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Banking and Financial Institutions > Topic 5: Management of Capital > Flashcards

Topic 5: Management of Capital Flashcards

(66 cards)

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1
Q

It is the net worth available to the equity holders

A

Bank Capital

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2
Q

It acts as a protection to the bank from unexpected risks and losses

A

Bank Capital

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3
Q

It gives assurance to the depositors and the creditors that their funds are safe, and it indicates the ability of the bank to pay for its liabilities

A

Bank Capital

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4
Q

It funds for expansion in banking operations or for the procurement of any assets

A

Bank Capital

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5
Q

More permanent in nature

A

Tier 1 Capital

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6
Q

It consists of common stock and disclosed reserves

A

Tier 1 Capital

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7
Q

Acts as primary support in the case of the absorption of losses

A

Tier 1 Capital

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8
Q

It can be depleted without placing the bank into insolvency or liquidation

A

Tier 1 Capital

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9
Q

Temporary or fluctuating in nature

A

Tier 2 Capital

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10
Q

It consists of funds that are not disclosed in the financial statements of the bank

A

Tier 2 Capital

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11
Q
  • revaluation reserves
  • undisclosed reserves
  • hybrid instruments
  • subordinated term debt
A

Tier 2 Capital

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12
Q

Also called Core Capital

A

Tier 1 Capital

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13
Q

Also called Supplementary Capital

A

Tier 2 Capital

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14
Q

Also called Supporting Capital

A

Tier 3 Capital

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15
Q

It is there to shield the market risk, commodity risk, and foreign currency risk

A

Tier 3 Capital

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16
Q

Who created the Basel Accords?

A

Basel Committee on Bank Supervision (BCBS)

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17
Q

It is a series of three international banking regulatory meetings that established capital requirements and risk measurements for global banks

A

Basel Accords

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18
Q

Also known as the Basel Capital Accord

A

Basel 1

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19
Q

When was Basel Capital Accord formed?

A

In 1988

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20
Q

Why is Basel 1 made?

A

It’s because there are a growing number of international banks and the increasing integration and interdependence of financial markets

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21
Q

It provided a framework for managing credit risk through the risk-weighting of different assets

A

Basel 1

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22
Q

It classifies an asset according to the level of risk associated with it

A

Basel 1

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23
Q

What is the risk weight percentage of Cash and Government Securities?

A

0%

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24
Q

What is the risk weight percentage of Public Debt?

A

10%

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25
What is the risk weight percentage of Interbank Loans?
20%
26
What is the risk weight percentage of Residential Mortgages?
50%
27
What is the risk weight percentage of Private Sector Debt?
100%
28
How much percentage is the risk-free assets?
0%
29
How much percentage is the the very risky assets?
100%
30
Banks that operate internationally must maintain capital (Tier 1 and Tier 2) equal to ______________ of their risk-weighted assets (RWA)
at least 8%
31
is critical to ensure that banks have enough cushion to absorb a reasonable amount of losses before they become insolvent
Capital Adequacy Ratio (CAR)
32
What are the limitations of Basel 1?
- The minimum capital requirements were determined by looking at credit risk only - It provided a partial risk management system, as both operational and market risks were ignored
33
When was Basel 2 created?
June 26, 2004
34
Also known as the International Convergence of Capital Measurement and Capital Standards: A Revised Framework
Basel 2
35
What are the 3 main pillars of Basel 2?
- Minimum Capital Requirements - Regulatory Supervision - Market Discipline
36
What is the minimum capital adequacy requirement of the Risk-Weighted Assets
8%
37
Occurs when a party fails to abide by the terms and conditions of a financial contract
Credit Risk
38
Hazards companies face in their day to day operations
Operational Risk
39
The losses a bank might suffer due to adverse changes in commodity prices, security prices, currencies, and interest rates
Market Risk
40
Provides banks with more informed approaches to calculate capital requirements based on credit risk, while taking into account each type of asset's risk profile and specific characteristics
Basel 2
41
Involves the use of credit ratings from external credit assessment institutions for the evaluation of the creditworthiness of a bank’s debtor
Standardized Approach
42
Banks use their own assessments of parameters such as the Probability of Default, Loss Given Default and Exposure at Default
Foundation Internal Ratings-Based Approach (FIRB)
43
Banks use their own assessments for all risk components and other parameters
Advanced Internal Ratings-Based Approach (AIRB)
44
Banks are obligated to assess the internal capital adequacy for covering all risks they can potentially face in the course of their operations
Regulatory Supervision (Basel 2)
45
Responsible for ascertaining whether the bank uses appropriate assessment approaches and covers all risks associated
Supervisor
46
A bank must conduct periodic internal capital adequacy assessments
Internal Capital Adequacy Assessment Process (ICAAP)
47
Supervisors must review and evaluate the internal capital adequacy assessments, strategies, and their ability to monitor their compliance with the regulatory capital ratios
Supervisory Review and Evaluation Process (SREP)
48
Banks must maintain their capital structure above the minimum level defined by Pillar 1
Capital above the minimum level
49
Aims to ensure __________________ by making it mandatory to disclose market information
Market Discipline
50
This is done done to make sure that the users of financial information receive the relevant information to make informed trading decisions
Market Discipline
51
What are the limitations of Basel 2?
- Too much regulatory compliance - Over-focused on credit risk - Complex and demanding for supervisors and unsophisticated banks
52
Why was Basel 3 created?
Because of the Global Financial Crisis of 2008 that exposed the weaknesses of the international financial system
53
Introduced a set of reforms designed to improve the regulation, supervision, and risk management within the banking sector
Basel 3
54
Helps handle shocks form financial stress and to strengthen their transparency and disclosure
Basel 3
55
What are the 3 pillars for Basel 3?
- Enhanced Minimum & Liquidity Requirements - Enhanced Supervisory Review Process - Enhanced Risk Disclosure & Market Discipline
56
Under Basel 3, the minimum total capital ratio is _____
12.9%
57
Under Basel 3, the minimum Tier 1 capital ratio is ____ of its RWA
10.5%
58
Under Basel 3, the minimum Tier 2 capital ratio is of the RWA
2%
59
During periods of __________________, banks must set aside additional capital
Credit Expansion
60
During periods of __________________, capital requirements must be relaxed
Credit Contraction
61
Reduces the risk of such periods of deleveraging in the future and the damage they inflict on the broader financial system and economy
Leverage Ratio
62
Intended to reinforce the risk-based capital requirements with a simple, non-risk-based "backstop"
Leverage Ratio
63
enhances banks' short-term resilience by ensuring that it has sufficient high-quality liquid assets to survive a significant stress scenario lasting for one month (30 days)
Liquidity Coverage Ratio
64
promotes banks' long-term reliability by creating incentives for banks to fund their activities with more stable sources of funding on an ongoing basis
Net Stable Funding Ratio
65
portion of its capital and liabilities that will remain with the institution for more than one year
Available Stable Funding
66
based on the composition of the assets on the bank's balance sheet
Required Stable Funding

Banking and Financial Institutions (7 decks)

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