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FRM Part II · FRM Exam Part II · High-level Summary of Basel III Reforms

A bank has a USD 100 million income-producing real estate (IPRE) exposure where repayment depends materially on property cash flows, LTV is 70%. Under the revised SA-CR, assume the risk weight for IPRE with LTV above 60% and up to 80% is 90%, versus 70% for LTV 60% or below... and the bank also has an equal USD 100 million exposure with LTV of 55% in the same class at the lower bucket. Assume the lower bucket (60% or below) weight is 70%. Compute the combined RWA for both exposures, and the capital at an 8% ratio.

The 70% LTV loan falls in the higher bucket at a 90% weight, giving 90 million of RWA, and the 55% LTV loan at 70% gives 70 million. Total RWA is USD 160 million, and 8% capital is USD 12.8 million.

  1. ARWA USD 160 million; capital USD 12.8 millionCorrect
  2. BRWA USD 140 million; capital USD 11.2 million
  3. CRWA USD 180 million; capital USD 14.4 million
  4. DRWA USD 160 million; capital USD 16 million

Explanation

RWA = 100 x 90% + 100 x 70% = 90 + 70 = 160 million. Capital at 8% = 12.8 million. Applying 70% to both gives 140 (wrong bucket for the 70% LTV); a 10% capital ratio would give 16.

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