FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms
A bank has a USD 10 million off-balance-sheet commitment to a corporate that is unconditionally cancellable at any time without prior notice. Under the revised standardised approach, what credit conversion factor (CCF) applies, and what is the resulting exposure amount?
The CCF is 10%, giving an exposure of USD 1 million. The finalised Basel III reforms introduced a 10% CCF for unconditionally cancellable commitments, replacing the earlier 0%. Other commitments generally carry 40%.
- A0% CCF; exposure USD 0
- B10% CCF; exposure USD 1 millionCorrect
- C20% CCF; exposure USD 2 million
- D40% CCF; exposure USD 4 million
Explanation
Basel III finalised reforms replaced the former 0% CCF for unconditionally cancellable commitments with 10%. Exposure = 10 million x 10% = 1 million. The 0% option reflects the old Basel II treatment; 40% applies to other commitments.
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