Math2881 Student-Made Revision Questions and Answers
What is the primary function of a bank?
To act as an intermediary in the transfer of funds between depositors and borrowers.
What are the banking book and trading book?
The banking book is the bank’s portfolio of retail-related assets such as commercial loans, retail loans, mortgages and retail deposits. The trading book is the bank’s portfolio of tradable securities.
How does a bank make money through the banking book?
By charging a higher rate of interest on loans than on deposits.
List and briefly describe the different types of risk a bank faces. * Credit risk: The risk of loss due to a counterparty failure * Market risk: The risk of loss due to adverse movements in market rates * Operational loss: The risk of loss arising from external events or from inadequate or failed internal processes, systems or people. Also can be considered any loss not arising from credit or market risk.
When was Basel I finalised, what risks did it deal with and what was its approach?
Basel I was finalised in 1988. It dealt with credit risk, and involved the determination of a minimum capital requirement equal to 8% of total risk-weighted assets.
When and how was Basel I amended?
Basel I was amended in 1996 to include a minimum capital requirement for market risk, based on a value at risk (VaR) calculation.
What is VaR?
The maximum expected loss over a given time period at a certain confidence level.
When was Basel II finalised and what were the two major differences from Basel I?
Basel II was finalised in 2006. The major differences were: * The minimum capital requirement for credit risk could be calculated using a Standardised Approach (SA) or Internal Ratings Based Approach (IRB). The SA is similar to the Basel I approach but allows for greater sensitivity to risk by using external credit ratings to determine risk-weights. With IRB, the bank uses its own calculations to determine risk-weights. * Basel II included a minimum capital requirement for
To act as an intermediary in the transfer of funds between depositors and borrowers.
What are the banking book and trading book?
The banking book is the bank’s portfolio of retail-related assets such as commercial loans, retail loans, mortgages and retail deposits. The trading book is the bank’s portfolio of tradable securities.
How does a bank make money through the banking book?
By charging a higher rate of interest on loans than on deposits.
List and briefly describe the different types of risk a bank faces. * Credit risk: The risk of loss due to a counterparty failure * Market risk: The risk of loss due to adverse movements in market rates * Operational loss: The risk of loss arising from external events or from inadequate or failed internal processes, systems or people. Also can be considered any loss not arising from credit or market risk.
When was Basel I finalised, what risks did it deal with and what was its approach?
Basel I was finalised in 1988. It dealt with credit risk, and involved the determination of a minimum capital requirement equal to 8% of total risk-weighted assets.
When and how was Basel I amended?
Basel I was amended in 1996 to include a minimum capital requirement for market risk, based on a value at risk (VaR) calculation.
What is VaR?
The maximum expected loss over a given time period at a certain confidence level.
When was Basel II finalised and what were the two major differences from Basel I?
Basel II was finalised in 2006. The major differences were: * The minimum capital requirement for credit risk could be calculated using a Standardised Approach (SA) or Internal Ratings Based Approach (IRB). The SA is similar to the Basel I approach but allows for greater sensitivity to risk by using external credit ratings to determine risk-weights. With IRB, the bank uses its own calculations to determine risk-weights. * Basel II included a minimum capital requirement for