Question 1

The use of risk-based capital measures under Basel I (1993) effectively mark-to-market the bank's on- and off-balance-sheet for the purpose of reflecting credit and market risk.

Accepted Answer

The use of risk-based capital measures under Basel I (1993) does indeed mark-to-market the bank's on- and off-balance-sheet for the purpose of reflecting credit and market risk. This was a major development in banking regulation and helped to improve the accuracy and transparency of banks' financial positions.

Question 2

Basel III guidelines for determining risk-weighted on-balance-sheet assets relies more heavily on credit agency ratings than did Basel I.

Accepted Answer

Basel III guidelines do rely more heavily on credit agency ratings than Basel I for determining risk-weighted on-balance-sheet assets.

Question 3

Under Basel II (2006), regulatory minimum capital requirements for credit, market, and operational risks are covered in the first pillar of the regulation.

Accepted Answer

Under Basel II, minimum capital requirements for credit, market, and operational risks are covered in the first pillar, which focuses on quantitative measures for risk management. The second pillar covers supervisory oversight and the third pillar covers market discipline and disclosure.

Question 4

Counterparty credit risk is the risk that the other party of a contract will default on contract obligations.

Accepted Answer

This is the correct definition of counterparty credit risk.

Question 5

Under Basel II (2006), operational risk can be measured by four different approaches.

Accepted Answer

Under Basel II, operational risk can be measured using three approaches: the Basic Indicator Approach, the Standardized Approach, and the Advanced Measurement Approach.

Question 6

Counterparty credit risk is more prevalent for exchange-traded derivatives than over-the-counter (OTC) contracts because the bank has more control of its OTC contracts.

Accepted Answer

This statement is incorrect. Counterparty credit risk is actually more prevalent for OTC contracts because they are customized and lack the transparency and standardization of exchange-traded derivatives. Banks may not have the same level of control over their OTC contracts as they do over exchange-traded derivatives, which can increase the risk of default by the counterparty.

Question 7

In evaluating the risk-weighted asset value of foreign exchange forward contracts, the value of the current exposure can be either positive or zero.

Accepted Answer

The current exposure of a foreign exchange forward contract can either be positive or zero, depending on the current market value of the contract. If the current market value is positive, it represents a current exposure, and if it is zero, there is no current exposure. The risk-weighted asset value of the contract takes into account this current exposure.

Question 8

Similar to Basel II, Basel III will require banks to assign on-balance-sheet assets to one of four categories of credit risk exposure.

Accepted Answer

Basel III does not require banks to assign on-balance-sheet assets to one of four categories of credit risk exposure; this is a characteristic of Basel II, which introduced standardized approaches for credit risk. Basel III focuses more on improving the quality and quantity of capital, risk coverage, leverage ratios, and liquidity standards.

Question 9

Determining risk-weighted asset values for OBS market contracts requires multiplying the notional values by the appropriate risk weights.

Accepted Answer

The answer of Determining risk-weighted asset values for OBS market...

Question 10

Basel II attempts to encourage market discipline by having banks disclose capital structure, risk exposures, and capital adequacy in a systematic manner.

Accepted Answer

This statement is true. Basel II aims to promote market discipline by requiring banks to disclose their capital structure, risk exposures, and capital adequacy in a transparent and standardized way. This allows market participants to better understand the risks undertaken by banks and make more informed decisions about their investments or lending activities.

Question 11

The evaluation of credit risk of off-balance-sheet (OBS) assets under Basel III requires that the notional amount of OBS items be converted to credit equivalent amounts of on-balance-sheet items.

Accepted Answer

This statement is true. The conversion of notional amounts to credit equivalent amounts is necessary to calculate the potential credit risk of off-balance-sheet items and to incorporate them into overall risk assessments under Basel III.

Question 12

The risk-weighted asset values of OBS market contracts or derivative instruments are determined in a manner similar to the risk-weighted asset values of contingent guarantee claims.

Accepted Answer

The answer of The risk-weighted asset values of OBS market...

Question 13

Under Basel III, banks are allowed to use their internal estimates of borrower creditworthiness to assess credit risk subject to strict disclosure standards.

Accepted Answer

This is true. Basel III allows for the use of internal models to estimate credit risk, but requires banks to disclose their methods and results to regulatory authorities.

Question 14

Under Basel III, the risk-weighted value of the bank's on-balance-sheet assets can be found by adding the products of the risk weights for each asset times the market value of each asset.

Accepted Answer

The answer of Under Basel III, the risk-weighted value of...

Question 15

The determination of risk-weighted on-balance-sheet assets under Basel III requires the segregation of assets into nine categories of credit risk exposure.

Accepted Answer

This statement is true. Basel III requires the segregation of assets into nine categories of credit risk exposure for the determination of risk-weighted on-balance-sheet assets.

Question 16

In addition to establishing minimum capital requirements, Basel II proposed procedures to ensure that sound internal process are used to assess capital adequacy and to set targets that are commensurate with the risk profile and environment.

Accepted Answer

This statement accurately describes one of the proposals of Basel II.

Question 17

As compared to Basel I, the standardized approach of Basel III is designed to produce capital ratios that are more in line with the actual economic risks that the DIs are facing.

Accepted Answer

The standardized approach of Basel III is designed to produce capital ratios that are more in line with the actual economic risks that the DIs are facing, as compared to Basel I.

Question 18

Under Basel III, OBS contingent guaranty contracts are assigned the same risk weights as on-balance-sheet principal items to determine their risk-weighted asset values.

Accepted Answer

OBS contingent guaranty contracts are treated similarly to on-balance-sheet principal items under Basel III, and are assigned the same risk weights to determine their risk-weighted asset values.

Question 19

In determining the risk-weighted value of the on-balance-sheet credit equivalent amounts of the contingent guaranty contracts, the risk weights are determined by the credit rating of the underlying counterparty of the off-balance-sheet activity.

Accepted Answer

The risk weights of the on-balance-sheet credit equivalent amounts of the contingent guaranty contracts are determined by the credit rating of the underlying counterparty of the off-balance-sheet activity.

Question 20

A deficiency of the risk-based capital ratio is that it measures the ability of a bank to meet both the on- and off-balance-sheet credit risk, but not interest rate risk and market risks.

Accepted Answer

The risk-based capital ratio only measures credit risk, not interest rate risk or market risks.

Quiz 21: Capital Adequacy