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The correct answer is C

 

The purpose for addressing market discipline in Basel II is to benefit all financial market participants, banks, investors, and regulators of timely and relevant banking operations and activities while simultaneously recognizing the sensitivity of proprietary internal operations.

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2、Market discipline is mainly addressed in Basel II through the mechanism of the disclosure of:

A) all credit-risk exposures.   

B) proprietary banking operations. 

C) competitive-sensitive internal operations.

D) timely and relevant information about banking operations and activities. 

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 AIM 16: Describe the four principles of the Basel II Accord’s Second Pillar and describe specific issues that should be addressed as part of the supervisory review process.

 

1、James Haggerty is a bank supervisor responsible for the oversight of UrbanGroup, a large banking conglomerate. UrbanGroup determines its credit risk profile according to the foundation IRB approach and assesses operational risk according to the standardized approach as described in the Basel II Capital Accord. Which of the following are specific issues that should be addressed as part of Haggerty’s supervisory review process of UrbanGroup?

 

I. Review the bank’s internal control systems.

II. Check compliance with transparency requirements as described in Pillar 3 of the Basel II Accord.

III. Make sure that the bank is using LGD and EAD inputs for its retail exposures that are in compliance with supervisory estimates.

IV. Evaluate the impact of interest rate risk by assessing the impact of a 100 basis point interest rate shock to the bank’s capital position.

 

A) III and IV only.   

B) I, II, III, and IV.  

C) I and II only.   

D) I, II, and III only. 

nayizhenfeng

 

The correct answer is C

 

The supervisor’s duties as part of the supervisory review process include:

Check compliance with Pillars I and III of the Basel II Accord, which would include credit risk mitigation and transparency requirements.

Review internal control systems.

Assess internal capital management methods employed by the bank.

Assess risks not adequately addressed under Pillar 1.

Note that the IRB approach for retail exposures is distinct from other IRB approaches in that there is no foundation approach and that PD, LGD, and EAD estimates are all determined by the bank. Also, the impact of interest rate risk on the bank’s capital position must be assessed by determining the impact of a 200 basis point shock.

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2、To ensure minimal capital adequacy, Basel II suggests supervisors:

A) provide opportunities for increased dividend payments.  

B) restrict overly generous dividend payments. 

C) recommend sources of additional capital.  

D) reduce monitoring intensity.

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The correct answer is B

 

The supervisory review process suggests that supervisors restrict dividend payments to ensure minimal capital adequacy.

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AIM 15: Discuss the “evolutionary aspect” of the risk measurement procedures addressed in the Basel II Accord.

1、Risk measurement procedures under the Basel II Accord take on an “evolutionary aspect” in that:

A) enhanced supervisory control will lead to more consistent risk assessment and more comparable bank risk profiles.   

B) stricter adherence to standardized risk assessment procedures will allow banks more flexibility to take on non-traditional risks.  

C) banks should be able to use their own internal risk assessments to improve accuracy in assessing their risk exposure. 

D) less conservative risk measures such as downturn loss given default (LGD) will allow banks to take on more risky strategies. 

nayizhenfeng

 

The correct answer is C

 

The evolutionary aspect of Pillar I arises from the desired goal of having banks move away from standardized risk measurement approaches to foundation IRB approaches, and ultimately on to advanced IRB approaches. Under the advanced IRB approach, banks will use internal risk assessment models to keep pace with changes in the marketplace. Enhanced supervisory controls or stricter adherence to standardized risk assessment would be counter to this goal. Note that downturn LGD is a more conservative risk measure.

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7、Basel II allows which of the following options for the calculation of operational risk?

Standardized risk.

Foundation IRB approach.

Basic indicator approach.

A) I only.

B) II and III only.  

C) I and III only.  

D) I, II, and III.

nayizhenfeng

 

The correct answer is C

 

For calculating operational risk requirements, the three allowed approaches are (1) basic indicator approach, (2) standardized approach, and (3) advanced measurement approach. The foundation IRB approach is used for credit risk.