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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