nayizhenfeng

 

7、Under the IRB approach of the Basel II Accord, an unexpected loss:

A) should be part of the probability of default (PD) calculation.  

B) might occur as a result of an economic downturn.  

C) should be covered by loan loss provisions and interest margins.   

D) can be avoided by using historical default rates to estimate losses.

nayizhenfeng

 

The correct answer is B

 

Losses predicted by historical default rates are expected and should be covered by loan loss provisions. Unexpected losses are unexpected variations from expected losses. An example would be the losses that arise during an economic downturn when many loans default at the same time.

nayizhenfeng

 

8、Under the Basel II Accord, the standardized approach to credit risk weighting requires all of the following EXCEPT:

A) wherever possible, risk weights must be based on external risk assessments. 

B) past-due loans must receive a credit risk weighting of 150%.  

C) risk exposures with no external weighting must receive a risk weighting of 100%.  

D) sovereign credit risks must receive the same risk weighting as corporate credits domiciled in that sovereign. 

nayizhenfeng

 

The correct answer is D

 

The standardized approach is based primarily on external risk assessments. If no such risk assessments are available, this approach requires a 100% risk weighting. Past due loans must be given a 150% risk weight. However, sovereign (government) credit risks would probably receive lower risk weights than corporate credits due to the added flexibility that governments have as opposed to corporations.

nayizhenfeng

 

15、The advanced IRB approach to calculating risk weights for corporate, sovereign, and bank exposures requires the bank to abide:

A) only by supervisory-set probabilities of default (PD).  

B) by supervisory-set PD and losses given default (LGD).  

C) only by supervisory-set LGD.  

D) by supervisory-set documentation requirements.

nayizhenfeng

 

The correct answer is D

 

The advanced IRB approach allows banks to set their own PD and LGD, as long as they meet rigorous standards of supervisory documentation requirements.

nayizhenfeng

 

AIM 4: Discuss the concepts of expected loss, unexpected loss calibration, and downturn loss given default that are part of the IRB approach.

1、The Basel II Accord incorporates the concept of a downturn LGD. The rationale for using a downturn LGD is to:

A) provide a more conservative estimate of unexpected losses.  

B) assure that banks have adequate reserves to cover expected losses. 

C) force banks to use historical default rates in estimating unexpected losses.  

D) generate a more accurate estimate of default probability (PD).

nayizhenfeng

 

The correct answer is A

 

A downturn LGD assumes several borrowers in similar areas simultaneously default, as a result of an economic downturn. This gives rise to an unexpected loss. If historical default rates are used, the loss estimate will probably be too low.

nayizhenfeng

 

2、Name concentration represents a violation of which condition necessary for the ASRF IRB model?

A) The assumption that all borrowers in the same region and industry have a correlation of 0.5.  

B) Risk weights for each obligor depend upon the systematic risk specific to the portfolio.

C) Systematic risk is defined by a single factor.  

D) Portfolios are composed of granular assets.

nayizhenfeng

 

The correct answer is D

 

Name concentration represents an excess exposure to a specific obligor in the portfolio making assets non-granular.