Matching
The risk-based capital requirements have received several types of criticism.Please match the criticism headings below (as stated in the text)with the appropriate criticism.
Premises:
The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk.
Because DIs may have little incentive to make high risk commercial loans, one important aspect of intermediation may be somewhat curtailed.
The benefits may not support the significant cost of developing and implementing new risk management systems.
Banks in the U.S. likely would need additional capital to meet the new minimum standards.
The BIS plans largely ignore the covariance among asset risks between different parties.
Because rating agencies often lag rather than lead the business cycle, risk weights based on a loan's credit rating may not accurately measure the relative risk exposure of individual borrowers.
Interest rate and liquidity risks are not yet included in the proposed Basel III plan.
Because of different tax, accounting, and safety-net rules and the application of the new Basel III rules to different industries, a level playing field across banks in different countries will not occur.
Regulators may not be trained or willing to make the necessary decisions that may rely heavily on judgment.
Responses:
DI specialness
Pillar 2 may ask too much of regulators
Risk weights based on external credit ratinc agencies
Other risks
Competition
Impact on capital requirements
Risk weights
Excessive complexity
Portfolio aspects
Correct Answer:
Premises:
Responses:
The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk.
Because DIs may have little incentive to make high risk commercial loans, one important aspect of intermediation may be somewhat curtailed.
The benefits may not support the significant cost of developing and implementing new risk management systems.
Banks in the U.S. likely would need additional capital to meet the new minimum standards.
The BIS plans largely ignore the covariance among asset risks between different parties.
Because rating agencies often lag rather than lead the business cycle, risk weights based on a loan's credit rating may not accurately measure the relative risk exposure of individual borrowers.
Interest rate and liquidity risks are not yet included in the proposed Basel III plan.
Because of different tax, accounting, and safety-net rules and the application of the new Basel III rules to different industries, a level playing field across banks in different countries will not occur.
Regulators may not be trained or willing to make the necessary decisions that may rely heavily on judgment.
Premises:
The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk.
Because DIs may have little incentive to make high risk commercial loans, one important aspect of intermediation may be somewhat curtailed.
The benefits may not support the significant cost of developing and implementing new risk management systems.
Banks in the U.S. likely would need additional capital to meet the new minimum standards.
The BIS plans largely ignore the covariance among asset risks between different parties.
Because rating agencies often lag rather than lead the business cycle, risk weights based on a loan's credit rating may not accurately measure the relative risk exposure of individual borrowers.
Interest rate and liquidity risks are not yet included in the proposed Basel III plan.
Because of different tax, accounting, and safety-net rules and the application of the new Basel III rules to different industries, a level playing field across banks in different countries will not occur.
Regulators may not be trained or willing to make the necessary decisions that may rely heavily on judgment.
Responses:
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