THE CFO AT A BANK IS PREPARING A REPORT TO THE BOARD OF DIRECTORS...
20.
The CFO at a bank is preparing a report to the board of directors on its compliance with Basel requirements.
The bank's average capital and total exposure for the most recent quarter is as follows:
REGULATORY CAPITAL
USD MILLIONS
Total Common Equity Tier 1 Capital
108
Additional Tier 1 Capital
28
Prior to regulatory adjustments
34
Regulatory adjustments
6
Total Tier 1 Capital
136
Tier 2 Capital
36
Prior to regulatory adjustments
45
Regulatory adjustments
9
Total Capital
172
Total Average Exposure
3678
Using the Basel III framework, which of the following is the best estimate of the bank’s current leverage ratio?
a.
2.94%
b.
3.70%
c.
4.68%
d.
5.08%
Correct Answer: b
Rationale:
For Basel III purposes, the leverage ratio is Tier 1 Capital / Total Exposure = 136 / 3,678= 3.70%.
Section: Operational and Integrated Risk Management
Reference:
“Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems—Revised
Version,” Basel Committee on Banking Supervision Publication, June 2011.
Learning Objective:
Describe changes to the regulatory capital framework, including changes to: Risk coverage,
the use of stress tests, the treatment of counter-party risk with credit valuation adjustments, the use of external
ratings, and the use of leverage ratios.
Reference:
John Hull, Risk Management and Financial Institutions, 3rd Edition, Chapter 13, “Basel 2.5, Basel III, and
Dodd-Frank.”
Learning Objective:
Describe and calculate ratios intended to improve the management of liquidity risk, including
the required leverage ratio, the liquidity coverage ratio, and the net stable funding ratio.
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