Module: | MODULE B: RISK MANAGEMENT
Q320: Consider the following statements regarding the capital architecture under the Basel III framework:
1. Common Equity Tier 1 must be the predominant form of Tier 1 capital, consisting primarily of common shares and retained earnings.
2. Intangible assets and goodwill are fully included as eligible capital in the CET1 calculation to boost the bank's capital ratios.
3. Tier 1 capital is considered "going-concern" capital, whereas Tier 2 capital is strictly considered "gone-concern" capital.
Which of the statements given above is/are correct?
2. Intangible assets and goodwill are fully included as eligible capital in the CET1 calculation to boost the bank's capital ratios.
3. Tier 1 capital is considered "going-concern" capital, whereas Tier 2 capital is strictly considered "gone-concern" capital.
Which of the statements given above is/are correct?
✅ Correct Answer: C
The correct answer is C. Statement 1 is correct: The cornerstone of the Basel III framework is the enhancement of capital quality.
It mandates that Common Equity Tier 1 (CET1), comprising common shares and retained earnings, must form the predominant part of a bank's Tier 1 capital.
Statement 2 is incorrect: To ensure capital represents true loss-absorbing capacity, Basel III requires strict regulatory deductions.
Intangible assets, goodwill, deferred tax assets, and certain investments in other financial institutions must be fully deducted from CET1; they are never included to artificially boost ratios.
Statement 3 is correct: This is the fundamental distinction in capital layers.
Tier 1 is "going-concern" capital, designed to absorb losses while the bank remains solvent and continues operating.
Tier 2 is "gone-concern" capital, designed to absorb losses and protect depositors only in the event the bank is failing and entering liquidation.
It mandates that Common Equity Tier 1 (CET1), comprising common shares and retained earnings, must form the predominant part of a bank's Tier 1 capital.
Statement 2 is incorrect: To ensure capital represents true loss-absorbing capacity, Basel III requires strict regulatory deductions.
Intangible assets, goodwill, deferred tax assets, and certain investments in other financial institutions must be fully deducted from CET1; they are never included to artificially boost ratios.
Statement 3 is correct: This is the fundamental distinction in capital layers.
Tier 1 is "going-concern" capital, designed to absorb losses while the bank remains solvent and continues operating.
Tier 2 is "gone-concern" capital, designed to absorb losses and protect depositors only in the event the bank is failing and entering liquidation.