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Answer: Assign different credit risk weights for residential mortgages based on each mortgage's loan-to-value ratio.
B is correct. One of the key changes in the December 2017 Basel reforms was the introduction of a set of variable risk weights for residential mortgages which varied based on the risk of the mortgage. This risk is reflected mainly in the loan-to-value (LTV) ratio with higher LTV mortgages receiving higher risk weights. This replaces an old flat rate system. A is incorrect. The Basel reforms replaced the advanced measurement approach for operational risk, which required the use of internal models, with a standardized approach to be used by all banks. The new standardized approach does not allow internal modeling. C is incorrect. The new reforms eliminated the use of the IRB approach for these asset classes. D is incorrect. The 2017 reforms introduced a leverage ratio buffer that requires G-SiBs to have a higher minimum Tier 1 leverage ratio. Therefore, if anything, the target Tier 1 leverage ratio should increase. Also, the countercyclical buffer requirements were not changed as part of this reform.
Author: LeetQuiz Editorial Team
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What is the optimal course of action for a bank to comply with the updated Basel III regulations, considering that the Chief Risk Officer (CRO) of a major bank has instructed a team of risk managers to develop a strategy for implementing the changes to the guidelines finalized in December 2017? Additionally, how should the bank prepare, given the expectation that it will be classified as a global systemically important bank (G-SiB) by the implementation date?
A
Introduce an internally created model to determine the bank's operational risk capital.
B
Assign different credit risk weights for residential mortgages based on each mortgage's loan-to-value ratio.
C
Apply the advanced internal rating-based approach for certain types of credit exposures, such as exposures to banks and large corporations.
D
Decrease the bank's target level of its countercyclical buffer and its Basel III Tier 1 leverage ratio.
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