Lucky Dip
Provide one reason why banks hold capital
1) Absorb losses
2) Protect depositors
3) Meet regulatory requirements
Name one type of asset that typically receives a 0% risk weight
Cash, Government Bonds
Which of the following is the simplest measure of capital risk to calculate:
A) CET1 ratio
B) Leverage ratio
C) MREL ratio
B) 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: Capital risk is impacted by how much cash Nationwide has
False. This is liquidity risk
True or false: the failure of Northern Rock is an example of poor management of capital risk
False. Northern Rock failed due to a risky funding model and a lack of liquidity in a stress.
Why might two banks with the same total assets have different capital ratios?
Banks with different asset compositions (e.g. high-risk corporate loans vs. low-risk government bonds) will have different risk-weighted asset (RWA) values. A bank with more high-risk assets will have higher RWAs, requiring it to hold more regulatory capital to maintain a given CET1 ratio. This directly impacts its ability to expand lending and manage risk.
Which metric is more sensitive to asset-specific risk?
A) CET1 ratio
B) Leverage ratio
A) CET1 ratio, which is calculated using risk weighted assets (RWAs)
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
Which creditors would lose their money first (in terms of the creditor hierarchy) if Nationwide became insolvent?
1) Tier 2 holders
2) AT1 holders
3) CCDS holders
4) Covered Bond holders
5) Depositors
CCDS holders
How does the Standardised Approach for calculating RWAs differ from the Internal Ratings Based (IRB) approach?
Standardised Approach: Uses fixed risk weights assigned by regulators based on external ratings
IRB Approach: Allows banks to use internal models, offering more flexibility but increasing model risk
Name one consequence of a bank breaching its capital requirements
1) No dividends
2) No bonuses
3) Capital Plan submission
What is the cheapest way to increase capital?
Retain profits within the business to increase general reserves / equity
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.
What is the Countercyclical buffer set to by the Financial Policy Committee under 'standard' economic conditions?
2% of RWAs
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.
List the four risk components that make up Nationwide's Pillar 1 capital requirements?
Credit Risk, Counterparty Credit Risk, Operational Risk, and Market Risk
In the Internal Ratings Based (IRB) approach, what 3 key inputs drive the capital requirement?
Probability of Default (PD), Loss Given Default (LGD), Exposure At Default (EAD)
Name two reasons why a regulator might reject a bank’s application to use the IRB approach for calculating their capital requirements?
Bonus points if you can name an example !
1) Weak model governance or validation
2) Insufficient data quality or history
3) Inadequate risk management integration
4) Concerns about low capital outcomes
Example: Metro Bank in 2019 due to it's weakness in risk governance
What impact do the Big Thank You & Fairer Share payments have on the three main capital frameworks?
1) Risk based framework: lower retained earnings, therefore less CET1 capital
2) Leverage framework: lower retained earnings, therefore less Tier 1 capital
3) MREL framework: lower retained earnings, therefore less Tier 1 capital / MREL resources
Explain the distinction between expected loss and unexpected loss in capital risk management, and how banks prepare for each
Expected loss (EL) is the average anticipated loss based on historical data and statistical models. It is typically covered through pricing (interest rates, fees) and loan loss provisions.
Unexpected loss (UL) is the variation beyond EL that occurs during extreme conditions. Banks prepare for it by holding regulatory capital buffers such as Common Equity Tier 1 (CET1).