Basel Oawfp

Review Questions for Basel

There is no need to hand in this assignment. Suggested answers are already given below.

Technology Risks

Q1. The risk of loss faced by a FI due to loan fraud is _________ risk.

operational

Q2. How can interest expense be reduced by improved technological efficiency?

Banks could obtain access to low-cost sources of funds given the information on interest rates on trading platforms.

Q3. Provide four reasons as to why liquidity management so important.

i. Banks can avoid to sell their assets at fire-sale price to meet outflow of funds.

ii. Banks can obtain a better credit rating

iii. A bank can borrow from other banks at a lower rate.

iv. Banks could meet their prior loan commitments and retain customers.

Q4. What are the problems of deposit insurance?

i. Insured depositors have lesser incentives to monitor the risk taken by the bank.

ii. Bank managers may have the incentive to engage in moral hazard or more risky activities.

iii. Bank regulators could face the adverse selection problem especially if deposit insurance is optional.

iv. The deposits insurance fund can be exposed to losses beyond the insurance premium collected.

Q5. Which of the following statements indicate the bank has a good liquidity risk management?

a. The bank has a high loan to deposit ratio and the loans were lent to a few corporate clients.

b. The bank has a high ratio of unpledged assets.

c. The bank has a high variance in the ratio of loan losses to net loans.

d. Further analysis of the liability item “deposits from customers” in the balance sheet of a bank shows that the bank has a high proportion of volatile deposits.

Ans: B

The higher the ratio of unpledged assets, the better the liquidity is. The bank may use these unpledged assets and pledge these assets to get liquidity.

Capital Adequacy

Q6.

You are given the above risk weights using the Standardized...