GARP Updated 2016-FRR Exam Questions and Answers by dina

Comprehensive and Detailed In-Depth Explanation:

The BIS (Bank for International Settlements) "Principles for Sound Liquidity Risk Management and Supervision" (BCBS, September 2008) outlines 17 principles to enhance liquidity risk management. These principles include:

I:Principle 2 emphasizes aligning risk-taking incentives with liquidity risk exposures, ensuring business units are accountable for the liquidity implications of their activities.

II:Principle 11 focuses on managing intraday liquidity risks and collateral positions, critical for real-time payment and settlement systems.

III:Principle 17 requires public disclosure of liquidity risk profiles to promote market discipline and transparency.

Comprehensive and Detailed In-Depth Explanation:

Basel I (1988) defined Tier 1 capital as the core capital to absorb losses, primarily comprising common stock (equity) and disclosed reserves (retained earnings). Option A is correct. Subordinated debt (B) is Tier 2 capital, undisclosed reserves (C) were allowed in Tier 2 under certain conditions but not Tier 1, and short-term capital (D) isn’t a Basel I category. Tier 1’s focus on equity ensures loss absorption capacity, a principle retained in later frameworks.

Exact Extract from Official Source:

BCBS, "International Convergence of Capital Measurement and Capital Standards" (Basel I), July 1988, para. 14: "Tier 1 capital consists predominantly of common stock and disclosed reserves (retained earnings), representing the highest quality capital available to cover losses."

GARP FRR Study Notes, Regulatory Framework Section: "Under Basel I, Tier 1 capital is limited to common equity and disclosed reserves, excluding subordinated debt and undisclosed reserves, which fall under Tier 2."

Explanation:

Convexity measures the sensitivity of the duration of a bond to changes in interest rates. It is a measure of the curvature in the relationship between bond prices and yields, indicating how the duration of a bond changes as the yield changes.

ReferencesExplanation based on financial risk management principles.

According to Basel II Accord's operational risk categories, Business Continuity Planning (BCP) activities that fall within operational risk include:

Damage to Physical Assets: This covers risks related to the physical destruction or damage to bank assets.

Business Disruption and System Failures: This includes risks associated with operational disruptions and failures in systems that support business activities.