Capital Risk
True or false: Capital risk is impacted by how much cash Nationwide has?
False. This is liquidity risk
True or false: Risk weighted assets are used to calculate how much capital a bank needs to cover expected loss?
False. Expected loss is already reflected in a bank's capital position via balance sheet provisions (and technically via regulatory adjustments)
True of false: a higher risk weighting percentage equates to a higher level of credit risk for a particular asset?
True. RWAs are designed to cover unexpected credit risk losses.
Which is the simplest measure of capital risk: the CET1 ratio, the leverage ratio or the MREL ratio?
The leverage ratio. It is designed as a "backstop" measure and makes no adjustment for the level of risk in different lending types. This makes it simple to understand and calculate.
True or false: Nationwide holds the largest proportion of its capital for credit risk?
True. Credit risk accounts for >60% of Nationwide's capital requirements
True or false: Northern Rock is an example of poor management of capital risk?
False. No, Northern Rock failed due to a risky funding model and a lack of liquidity in a stress.
Which has the lowest risk weight percentage:
A) A UK government bond; or
B) A buy to let mortgage?
A: A UK government bond. For a UK based bank these bonds are assigned a 0% risk weight.
Which metric is more sensitive to asset-specific risk?
A) the CET1 ratio; or
B) the leverage ratio
A). The CET1 ratio, which is calculated using risk weighted assets.
True or false: The amount of profit that Nationwide makes is irrelevant for managing capital risk?
False. Retained profits are the largest constituent part of our capital resources
True or false: Risk weighted assets are used to account for all unexpected losses?
False. RWAs do not cover all stressed losses. The capital rules technically cover up to the 99.9% of credit risk losses in the RWA formula, but this is based on historic modelling. Extreme stressed losses would not be covered.
On average, which has a lower risk-weighting and why?
A) A buy-to-let mortgage; or
B) A owner-occupied mortgage
A) An owner-occupied mortgage, as people are more likley to default on an investment property rather than their primary residence.
What does MREL stand for?
Minimum Requirement for Eligible Liabilities
List the three components that make up Nationwide's capital requirements?
Credit Risk, Operational Risk and Market Risk
True or false: Nationwide's capital resources include the covered bonds that we issue to wholesale investors?
False: Covered bonds do not qualify as capital resources as they are not sufficiently loss absorbing. Specifically, the holders of these bonds are owed the same amount, regardless of the profitability of the Society.
Do centrally cleared derivatives have a high or low risk weighting, and why?
Low (2%). This is because centrally cleared derivatives benefit from the dissagregation of credit risk amongst all clearing members.
Why does Nationwide exhibit relative strength in its CET1 ratio vs its peers?
Nationwide's simple, low risk business model means that, on average, the assets on its balance sheet attract a lower risk weight than our peers.
Name a bank whose collapse or "bail-out" can be directly attributed to poor management of capital risk?
RBS or Lehman Brothers (open to other examples though)
How are Core Capital Deferred Shares (CCDS) loss absorbing, when other funding instruments (such as Senior Non-Preferred bonds) are not?
The terms of CCDS state that any return (distribution) to the note holders is at the discretion of management. So if Nationwide incurrs losses, CCDS returns can be halted. Additionally, the instruments are perpetual, so can only be 'redeemed' by selling them in the secondary market. So the price of CCDS is dependent on Nationwide's performance, much like normal shares on a stock exchange.
Which product has a higher risk weight and why:
A) Personal loan
B) Overdraft
A) Personal loan. Personal Loans have a significantly higher 'probability of default' than current accounts, which drives the higher risk weight. The higher PD is likley because current accounts are used on a daily basis as an important financial tool in people's lives. Customers do not want to risk losing access to their current account and would choose to default on a personal loan first.
Which capital framework is designed to manage cpaital risk at the point where a bank has failed (or is considered likley to fail)?
A) the risk-based framework (e.g. CET1 ratio);
B) the leverage framework; or
C) the MREL framework.
C) The MREL framework. MREL aims at requiring institutions’ creditors to participate in an institution’s losses by swapping a liability for regulatory capital at the point of failure. This reduces the risk of another public “bail-out”.