Match the following:

A) Credit Risk P) Asset Liability Management (ALM)

B) Operational Risk Q) Advanced IRB

C) Liquidity Risk R) Advanced measurement approach

D) Market Risk S) VaR (value at risk).

Solution

The first pillar of Basel II (Minimum capital requirements) deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk, and market risk. Other risks are not considered fully quantifiable at this stage. 1.The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB, Advanced IRB and General IB2 Restriction. IRB stands for "Internal Rating-Based Approach". 2.For operational risk, there are three different approaches – basic indicator approach or BIA, standardized approach or TSA, and the internal measurement approach (an advanced form of which is the advanced measurement approach or AMA). 3.For market risk the preferred approach is VaR (value at risk). ALM is used to manage Liquidity Risk