Under the Basel I framework, claims on Organization for Economic Cooperation and Development (OECD) government bonds are assigned a risk weight of 0%. This is based on the assumption that OECD governments are highly unlikely to default on their obligations. The 0% risk weight reflects the perceived safety and stability of these bonds, which are backed by the full faith and credit of OECD governments. These governments are typically characterized by strong and stable economies, robust institutional frameworks, and high levels of public sector transparency and accountability. Therefore, the risk of default is considered to be extremely low, justifying the 0% risk weight.

Choice A is incorrect. Uninsured residential mortgages are not assigned a risk weight of 0% under the Basel I framework. They carry credit risk and hence, are assigned a higher risk weight.

Choice B is incorrect. Commercial and consumer loans also carry credit risk and therefore, they are not assigned a 0% risk weight under the Basel I framework.

Choice D is incorrect. Claims on OECD banks and public sector entities do not have a 0% risk weight under the Basel I framework as they also carry some level of credit risk.

Things to Remember

• Risk-weighted assets are used in Basel I to calculate capital adequacy ratios, with different assets assigned different risk weights based on their credit risk.
• Basel I was the first international banking accord that aimed to establish minimum