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3、Pillar 3 of the Basel II Accord addresses the issue of market risk by requiring that internationally active banks:

A) include only common stock and noncumulative preferred stock in tier 1 capital.

B) enhance disclosure to improve transparency in the banking industry.  

C) never assign corporate credit risk weights below the risk weights of their country of origin.

D) use probability of default (PD) estimates based on downturn economic scenarios.

nayizhenfeng

 

The correct answer is B

 

Pillar 3 calls on banks to make disclosures that will improve transparency for all banking and financial system participants.

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4、Which of the following pairs correctly identifies an activity and its associated Pillar under the Basel II Accord?

 Activity                                illar

A) Market discipline                    Second and third 

B) External review                       First

C) Required disclosures                   Third

D) Capital calculation                     Second

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The correct answer is C

 

Required disclosures are mandated under the Third Pillar.

 

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AIM 18: Explain the negative bank behaviors that may result with the implementation of Basel II.

1、Which of the following bad bank behaviors at emerging market banks may result from the implementation of Basel II?

      I. Underestimation of risk and required capital for emerging market banks.

     II. Increased pro-cyclical lending.

    III. Tendency to not switch to advanced risk measurement methodologies.

A) I, II, and III.

B) I and II.

C) II and III.

D) I and III.

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The correct answer is A

 

Since some parameters are calibrated on G-7 banks, they tend to underestimate the risk at emerging market banks. Pro-cyclicality is a bad behavior at all banks, which includes emerging markets.

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2、Which of the following are incentives for bad bank behavior resulting from the implementation of Basel II?

      I. Risk calibration reduces tendency to switch to advanced risk measurement models.

     II. Banks are encouraged to lend more in good economies and less in bad economies.

    III. Banks may manage the output of their risk measurement systems as it may have firm-wide implications.

A) I only.

B) II only.  

C) I and III.  

D) II and III. 

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The correct answer is D

 

Underestimation of risk from calibrated parameters is only a problem for emerging market banks. Lending more in good times or pro-cyclicality is a continuing problem with the implementation of Basel II. A more pressing question is whether Basel II exacerbates or reduces the pro-cyclical tendency. Risk measurement systems have increasing importance under Basel II.

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AIM 19: Explain potential problems with the risk analytics of Basel II.

1、Which of the following are NOT potential problems with the risk analytics for Basel II?

      I. Estimating the correlation of defaults is difficult as simultaneous defaults are very rare.

     II. Validation of credit rating systems is difficult because default is rare.

    III. Using copulas to estimate correlation of default ignores fat tails.

    IV. Operational risk losses may be difficult to classify.

A) I only.  

B) III only. 

C) II only.  

D) Two of the above are not potential problems. 

nayizhenfeng

 

The correct answer is B

 

Copulas show promise in estimating correlation of default as they may include characteristics such as fat tails.