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Explanation:
Basel regulations do not have any legal standing. Instead, individual countries decide whether to incorporate the Basel standards into their domestic laws and regulations. The Basel Accords, developed by the Basel Committee on Banking Supervision (BCBS), are a set of recommendations for regulations in the banking industry. While these accords are not legally binding, they have been widely adopted worldwide due to their comprehensive approach to banking supervision. The accords aim to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses. However, the implementation of these standards is at the discretion of individual countries, and they are not legally enforceable unless enacted into law by the respective governments.
Choice A is incorrect. An enterprise risk management framework and activities do not consist of regulatory capital and economic capital only. It also includes operational risk, credit risk, market risk, liquidity risk, strategic risk among others.
Choice B is incorrect. Regulatory capital is not the internal capital that firms estimate to cover unexpected losses. Instead, it's the minimum amount of equity a bank must hold to reduce the risk of insolvency set by banking regulators.
Choice C is incorrect. Pillar 2 under Basel II does not pertain to market discipline; rather it
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Q.5103 A newly hired risk manager is preparing to present to the risk committee on the role of ERM in financial services in ensuring the solvency and sustainability of an institution through appropriate capital funding that covers any unexpected losses relating to any of the main risk classes. Which of the following points highlighted by the risk manager is correct?
A
An enterprise risk management framework and activities consist of regulatory capital and economic capital only
B
Regulatory capital is the internal capital that firms estimate, reflecting both their risk profile and potential needs to cover unexpected losses
C
Pillar 2, introduced under Basel II, is about market discipline
D
Basel regulations bear no legal grounds