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The correct answer is A

 

Correlation with other assets in the portfolio is not explicitly included in the risk estimation.

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AIM 6: Explain the IRB credit risk weight function, the variables, and their interrelationships.

 

1、The conditional PD used in the IRB credit risk weight function is based on:

      I. An asymptotic risk factor.

     II. A systematic risk factor of 0.0999.

    III. A correlation weighted sum of the default threshold and the systematic risk factor.

    IV. A Merton based mapping of downturn PD’s.

A) One of the above.  

B) Two of the above. 

C) Three of the above.  

D) All the above.

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The correct answer is B

 

Statements II and IV are true. The conditional PD is based on a systematic risk factor of 0.999 and a Merton based mapping of average PD’s.

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2、Which of the following are not TRUE regarding the ASRF IRB model?

      I. Correlations are calculated for each asset class.

     II. Maturity effects are less dramatic for low PD assets.

    III. PD estimates should reflect the PD in economic downturns.

    IV. Long-term credits are riskier than short-term credits.

A) II and III.  

B) II only. 

C) I and II.  

D) III and IV.

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AIM 5: List the necessary conditions for the IRB credit risk weight function.

1、Which of the following are NOT conditions for the IRB credit risk weight function?

A) Calculation of risk weights should be independent of the specific portfolio.

B) Expected and unexpected losses are covered by capital.  

C) The model includes a single market risk factor. 

D) All idiosyncratic risk is diversified away.

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The correct answer is B

 

Only unexpected capital losses are covered by capital. Expected losses are covered by earnings or reserves.

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The correct answer is D

 

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

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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.

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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).

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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.