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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.

nayizhenfeng

 

The correct answer is B

 

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

nayizhenfeng

 

2、The portfolio invariance assumption of the IRB credit risk model does NOT include:

A) correlation with other assets in the portfolio. 

B) diversification indirectly by calibrating the risk weight equation for a well diversified bank.

C) calculation of risk independent of the specific portfolio.  

D) correlation with a systematic risk factor.

nayizhenfeng

 

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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The correct answer is A

 

Maturity effects are more dramatic for low PD assets, as they have more opportunity to deteriorate in quality. LGD estimates are downturn estimates; PD are estimates of a normal economy.

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3、The maturity adjustment in the IRB credit risk weight function is:

      I. Based on a standard maturity of 2.5 years.

     II. Equal to zero for a maturity of one year.

    III. Higher for long-term credits.

    IV. Higher for high PD’s.

A) I and III.  

B) II and III. 

C) I and IV.  

D) II and IV.

nayizhenfeng

 

The correct answer is A

 

Equal to one for a maturity of one year. Higher for low PD’s.