Question

1. Explain some of the differences between Dow Jones Industrial Average (DJIA) and the NASDAQ index?
2. With respect to bank capitalization, what are the “Basel I” rules? Describe the weightings given to different types of debt.

Answer 1

DOW JONES INDUSTRIAL AVERAGE (DJIA)	NASDAQ INDEX
Dow Jones is typically the least volatile of the three major indices as many components are slower moving, blue-chip companies such as Boeing Company, United Healthcare, and 3M Company	The Nasdaq 100 is the most volatile of the three largely because of its high concentration in riskier, high growth companies such as Facebook, Amazon, and Alphabet (Google).
The "Dow" includes only 30 stocks, all of which are among the largest, richest and most heavily traded companies in the United States.	The Nasdaq composite index includes all companies listed on the Nasdaq Stock Market – more than 3,300 stocks in all
The Dow includes companies from all major sectors except utilities and transportation which have their own separate Dow Jones indexes. Although many people view the DJIA as an indicator of the broader market, in reality the movements of the Dow tell you something only about how large "blue chip" stocks are faring.	As such, it's considerably more broad-based than the Dow. However, the Nasdaq has a high concentration of technology stocks, so the composite index is more sensitive to that industry than other sectors. The composite index shouldn't be confused with the Nasdaq 100, which is an index of the 100 largest companies listed on the Nasdaq stock market.
The Dow Jones Industrial Average has been published since 1896, when it was created by "The Wall Street Journal" founder Charles Dow.	The Nasdaq composite index came into being in 1971 and is published by the Nasdaq market itself.

Basel I is a set of international banking regulations put forth by the Basel Committee on Bank Supervision (BCBS) that sets out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets. Basel I is the first of three sets of regulations known individually as Basel I, II and III and together as the Basel Accords.

1)The purpose was to prevent international banks from building business volume without adequate capital backing

2) The focus was on credit risk

3) Set minimum capital standards for banks

4) Became effective at the end of 1992

BASEL-I CAPITAL REQIREMENTS

• Capital was set at 8% and was adjusted by a loan’s credit risk weight
• Credit risk was divided into 5 categories: 0%, 10%, 20%, 50%, and 100%
  • Commercial loans, for example, were assigned to the 100% risk weight category

RISK WEIGHT CATEGORIES IN BASEL-I

0% Risk Weight:

• Cash,
• Claims on central governments and central banks denominated in national currency and funded in that currency
• Other claims on OECD countries, central governments and central banks
• Claims collateralized by cash of OECD government securities or guaranteed by OECD Governments

20% Risk Weight

• Claims on multilateral development banks and claims guaranteed or collateralized by securities issued by such banks
• Claims on, or guaranteed by, banks incorporated in the OECD
• Claims on, or guaranteed by, banks incorporated in countries outside the OECD with residual maturity of up to one year
• Claims on non-domestic OECD public-sector entities, excluding central government, and claims on guaranteed securities issued by such entities
• Cash items in the process of collection

   50 % Risk Weight

• Loans fully securitized by mortgage on residential property that is or will be occupied by the borrower or that is rented.

100% Risk Weight

• Claims on the private sector
• Claims on banks incorporated outside the OECD with residual maturity of over one year
• Claims on central governments outside the OECD (unless denominated and funded in national currency)
• Claims on commercial companies owned by the public sector
• Premises, plant and equipment, and other fixed assets
• Real estate and other investments
• Capital instruments issued by other banks (unless deducted from capital)
• All other assets

At National Discretion (0,10,20 or 50%)

• Claims on domestic public sector entities, excluding central governments, and loans guaranteed by securities issued by such entities