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 benefits may not support the significant cost of developing and implementing new risk management systems.
The BIS plans largely ignore the covariance among asset risks between different parties.
Banks in the U.S. likely would need additional capital to meet the new minimum standards.
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.
Regulators may not be trained or willing to make the necessary decisions that may rely heavily on judgment.
Because DIs may have little incentive to make high risk commercial loans, one important aspect of intermediation may be somewhat curtailed.
The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk.
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.
Responses:
Competition
Impact on capital requirements
DI specialness
Excessive complexity
Other risks
Risk weights
Portfolio aspects
Risk weights based on external credit rating agencies
Pillar 2 may ask too much of regulators
Correct Answer:
Premises:
Responses:
The benefits may not support the significant cost of developing and implementing new risk management systems.
The BIS plans largely ignore the covariance among asset risks between different parties.
Banks in the U.S. likely would need additional capital to meet the new minimum standards.
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.
Regulators may not be trained or willing to make the necessary decisions that may rely heavily on judgment.
Because DIs may have little incentive to make high risk commercial loans, one important aspect of intermediation may be somewhat curtailed.
The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk.
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.
Premises:
The benefits may not support the significant cost of developing and implementing new risk management systems.
The BIS plans largely ignore the covariance among asset risks between different parties.
Banks in the U.S. likely would need additional capital to meet the new minimum standards.
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.
Regulators may not be trained or willing to make the necessary decisions that may rely heavily on judgment.
Because DIs may have little incentive to make high risk commercial loans, one important aspect of intermediation may be somewhat curtailed.
The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk.
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.
Responses:
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