Westminster international university in tashkent

PILLAR 1: MINIMUM CAPITAL REQUIREMENTS
PILLAR 2: SUPERVISORY REVIEW PROCESS
PILLAR 3: MARKET DISCIPLINE

Q4. What is the core feature of Basel Accord III?

Answer:

"Basel III" is a comprehensive set of reform measures in banking prudential regulation developed by the BCBS, to strengthen the regulation, supervision and risk management of the banking sector. The Global Financial Crisis of 2008 exposed the weaknesses of the international financial system and led to the creation of Basel III. Basel III identified the key reasons that caused the financial crisis. They include poor corporate governance and liquidity management, over-levered capital structures due to lack of regulatory restrictions, and misaligned incentives in Basel I and II

Basel III strengthened the minimum capital requirements outlined in Basel I and II. In addition, it introduced various capital, leverage, and liquidity ratio requirements. According to regulations in Basel III, banks were required to maintain the following financial ratios such as net stable funding ratio (NSFR), liquidity coverage ratio (LCR), several buffers. Also, Basel III included new capital reserve requirements and countercyclical measures to increase reserves in periods of credit expansion and to relax requirements during periods of reduced lending. Under the new guideline, banks were categorized into different groups based on their size and overall importance to the economy. Larger banks were subjected to higher reserve requirements due to their greater importance to the economy.

Q. 5. What is credit risk ? How it could be computed ?

Answer:

Credit risk, the risk of loss due to a borrower being unable to repay a debt in full or in part, accounts for the bulk of most banks’ risk-taking activities and regulatory capital requirements. There are two broad approaches to calculating RWAs for credit risk: the standardised approach and the internal ratings based approach. Most banks around the world use the standardised approach (SA) for credit risk. Under this approach, supervisors set the risk weights that banks apply to their exposures to determine RWAs. This means that banks do not use their internal models to calculate risk-weighted assets. The internal ratings-based (IRB) approach for credit risk allows banks, under certain conditions, to use their internal models to estimate credit risk, and therefore RWAs. The 2017 reforms introduced some constraints to banks’ estimates of risk parameters. There are two main IRB approaches: Foundation IRB (F-IRB) and Advanced IRB (A-IRB)