Learning objectives: Assess the progress banks have made in the implementation of the standards. Examine the impact on the financial system posed by the standards.
Questions:
801.1. With respect to the new credit loss standards, each of the following is TRUE about the DIFFERENCE between the Basel capital models (per BCBS Guidance in December 2015) and the IASB and FASB expected credit loss (ECL) approaches EXCEPT which statement is false?
a. In regard to cycle sensitivity, Basel may be through-the-cycle but ISAB/FASB ECL is point-in-time
b. In regard to loss given default (LGD), Basel reflects downturn economic conditions but IASB/FASB ECL is intended to be neutral to the business cycle
c. In regard to loss recognition, Basel will require an incurred-loss model to maintain conservatism, but IASB/FASB ECL will permit deferred recognition of losses until maturity
d. In regard to measurement period, Basel assumes a one year period (12 months) but IASB/FASB ECL approaches are generally lifetime (or 12 months in Stage 1 per IASB)
801.2. In regard to the progress banks have made in the implementation of the new IASB and FASB expected credit loss (ECL) standards, which of the following statements is most TRUE (as of February 2018)?
a. Many banks are still assessing the impact and/or cannot quantify the transition impact
b. Self-described price-maker banks do not expect the new standards to have an impact on product pricing
c. Because banks already develop PD, LGD and EAD estimates, they do not generally have concerns about overall data quality or data availability
d. Most banks expect an decrease in loan provisions and an consequent increase in CET1 and total regulatory capital
801.3. In order to estimate the impact of the expected credit loss (ECL) model on the financial system, Cohen and Edwards develop two scenarios: a cyclical average scenario, and a early-provisioning scenario. These scenario analyses are used to infer the "what if" impact of an ECL model during the global financial crisis (GFC; specifically the pre-, during- and post-crisis years from 2006 to 2012). Put another way, these scenarios each attempt to retroactively predict if an ECL model would have had any impact during the GFC. Which of the following BEST summarizes their conclusion(s)?
a. Neither the cyclical average scenario nor the early-provisioning scenario imply a statistically significant impact due to the adoption of an ECL model
b. The cyclical average scenario did not imply a statistically significant impact, however the early-provisioning scenario implies that an ECL model probably would have resulted in higher provisions and lower lending ahead of the crisis
c. The cyclical average scenario implies higher provisions and greater lending ahead of the crisis, however the early-provisioning scenario does not imply a statistically significant impact on provisioning or lending
d. Both the cyclical average and the early-provisioning scenarios imply that an ECL model probably would have resulted in higher provisions and lower lending ahead of the crisis
Answers here:
Questions:
801.1. With respect to the new credit loss standards, each of the following is TRUE about the DIFFERENCE between the Basel capital models (per BCBS Guidance in December 2015) and the IASB and FASB expected credit loss (ECL) approaches EXCEPT which statement is false?
a. In regard to cycle sensitivity, Basel may be through-the-cycle but ISAB/FASB ECL is point-in-time
b. In regard to loss given default (LGD), Basel reflects downturn economic conditions but IASB/FASB ECL is intended to be neutral to the business cycle
c. In regard to loss recognition, Basel will require an incurred-loss model to maintain conservatism, but IASB/FASB ECL will permit deferred recognition of losses until maturity
d. In regard to measurement period, Basel assumes a one year period (12 months) but IASB/FASB ECL approaches are generally lifetime (or 12 months in Stage 1 per IASB)
801.2. In regard to the progress banks have made in the implementation of the new IASB and FASB expected credit loss (ECL) standards, which of the following statements is most TRUE (as of February 2018)?
a. Many banks are still assessing the impact and/or cannot quantify the transition impact
b. Self-described price-maker banks do not expect the new standards to have an impact on product pricing
c. Because banks already develop PD, LGD and EAD estimates, they do not generally have concerns about overall data quality or data availability
d. Most banks expect an decrease in loan provisions and an consequent increase in CET1 and total regulatory capital
801.3. In order to estimate the impact of the expected credit loss (ECL) model on the financial system, Cohen and Edwards develop two scenarios: a cyclical average scenario, and a early-provisioning scenario. These scenario analyses are used to infer the "what if" impact of an ECL model during the global financial crisis (GFC; specifically the pre-, during- and post-crisis years from 2006 to 2012). Put another way, these scenarios each attempt to retroactively predict if an ECL model would have had any impact during the GFC. Which of the following BEST summarizes their conclusion(s)?
a. Neither the cyclical average scenario nor the early-provisioning scenario imply a statistically significant impact due to the adoption of an ECL model
b. The cyclical average scenario did not imply a statistically significant impact, however the early-provisioning scenario implies that an ECL model probably would have resulted in higher provisions and lower lending ahead of the crisis
c. The cyclical average scenario implies higher provisions and greater lending ahead of the crisis, however the early-provisioning scenario does not imply a statistically significant impact on provisioning or lending
d. Both the cyclical average and the early-provisioning scenarios imply that an ECL model probably would have resulted in higher provisions and lower lending ahead of the crisis
Answers here:
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