How it works
Problem 1A run on uninsured deposits
L2.7.01 · L2.7.07A bank supervisor's analyst
Prairie Valley Bank is a made-up state-chartered bank in Kansas that is not a member of the Federal Reserve System. It has US$40bn of deposits, 85% of them in business accounts well above the US$250,000 insurance limit, and US$4bn of cash. On a Thursday, rumours spread among its business customers that it has large losses on its bonds.
Which statement best describes the risk and what would follow if the bank failed?
Problem 2Basel I, with a trap
L2.7.02A credit analyst reading an old annual report
You are comparing banks over time. In the early 1990s, Harbour City Bank, a made-up Hong Kong lender, reported these exposures (US$bn), with Tier 1 capital of US$4.5bn and Tier 2 of US$5.0bn.
| Exposure | US$bn |
|---|---|
| Cash | 4 |
| Bonds of OECD central governments | 16 |
| Loans to banks in OECD countries | 20 |
| Residential mortgages | 40 |
| Loans to companies | 45 |
| Undrawn commitments to companies, over 1 year | 10 |
What was its Basel I total capital ratio, in %? Give two decimals.
Problem 3Moving to Basel II
L2.7.02 · L2.7.03A capital planner at a European bank
Your bank lends only to companies: €40bn to firms rated aa, €30bn to firms rated a, €20bn to firms rated bbb, €10bn to firms rated b. Its gross income over the last three years was €2.4bn, €2.8bn, €2.6bn. It is moving from Basel I to Basel II's standardised approach for credit risk and the basic indicator approach for operational risk.
What is its total minimum capital requirement under Basel II, in € billions? Give two decimals.
Problem 4How much can we pay out?
L2.7.04A bank's group treasurer
Your bank is a G-SIB with a 1% surcharge, in a country whose countercyclical buffer is 2%. It has £300bn of RWA and £36bn of CET1. A trading loss of £10.5bn hits capital just before the board meets to set the dividend.
At most what percentage of its profits may the bank now pay out in dividends, buybacks and bonuses?
Problem 5Two LCRs, one riskier bank
L2.7.04 · L2.7.01A liquidity risk manager
Bank A holds €50bn of HQLA against €40bn of net stressed outflows; about 10% of its funding is short-term borrowing from other financial firms, the rest mostly retail deposits. Bank B holds €90bn of HQLA against €75bn of net outflows, and 60% of its funding is short-term borrowing from financial firms.
Which assessment is best?
Problem 6Below the SCR
L2.7.05An insurer's chief risk officer
Your EU insurer has assets of €12,000m, including €1,500m of listed shares. The best estimate of its liabilities is €10,100m, the risk margin €400m and other liabilities €300m. Its SCR is €900m; its MCR is 35% of that. Share prices then fall 30%.
What is the solvency ratio after the fall, in %? Hold the SCR fixed and ignore tax. Give one decimal.
Problem 7When staging hits capital
L2.7.06 · L2.7.04A bank's credit risk modeller
Your bank has a €50bn loan book, all in IFRS 9 stage 1, with a 12-month PD of 1.0% and an LGD of 40%. Its CET1 is €6bn and its RWA €60bn. A downturn moves €10bn of loans to stage 2, with a lifetime PD of 12%; the 12-month PD on the rest rises to 1.5%.
What is the CET1 ratio after the extra provisions, in %? Ignore tax, discounting and any change in RWA or transitional relief. Give two decimals.
Problem 8What a buffer release buys
L2.7.08 · L2.7.04An analyst at a macroprudential authority
A typical bank in your country has €16bn of CET1 and €160bn of RWA, and aims for a 10% CET1 ratio. Your downturn scenario brings a loss of €1.6bn and a 8% rise in RWA. Your committee is considering releasing the 1% countercyclical buffer, lowering banks' targets by the same amount.
By how much does the release reduce the RWA the bank would otherwise cut, in € billions?
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