FRM Part II · FRM Exam Part II · Credit Risk Management
A bank has a corporate exposure of USD 50 million with a risk weight of 80% under the standardized approach. Its minimum total capital requirement is 8% of risk-weighted assets. What is the minimum capital required for this exposure?
Minimum capital is USD 3.2 million. Risk-weighted assets equal 50 million times 80%, or 40 million, and an 8% requirement on that gives 3.2 million. Applying 8% to the unweighted exposure would wrongly give 4.0 million.
- AUSD 3.2 millionCorrect
- BUSD 4.0 million
- CUSD 32.0 million
- DUSD 2.0 million
Explanation
RWA = 50 × 0.80 = USD 40 million. Capital = 40 × 0.08 = USD 3.2 million. USD 4.0 million results from applying 8% to the full exposure with no risk weight (50 × 0.08), which ignores the risk weight.
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