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FRM Part II · FRM Exam Part II · Capital Regulation Before the Global Financial Crisis

A bank applies the Standardised Approach under Basel II. In a given year, its retail banking business line has gross income of 200 million (beta 12%) and its trading and sales line has gross income of 100 million (beta 18%). Its corporate finance line has a gross loss of 50 million (beta 18%). Using the Basel II rule that negative figures in one business line may offset positive figures in others in the year, what is the capital charge for that year?

The charge is 33 million. Under the Standardised Approach, each business line's gross income is multiplied by its beta and the results are summed, with negative amounts offsetting positives. That gives 24 plus 18 minus 9. Flooring the loss at zero would wrongly give 42 million.

  1. A42 million
  2. B33 millionCorrect
  3. C24 million
  4. D51 million

Explanation

Retail: 12% x 200 = 24. Trading: 18% x 100 = 18. Corporate finance: 18% x (-50) = -9. Sum = 24+18-9 = 33 million. Flooring the negative at zero would give 42 million, which is wrong because offset is permitted in the Standardised Approach (unless the total is negative, in which case the year's charge is zero).

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