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

A bank has a USD 100 million off-balance-sheet commitment to a corporate client that is a standby letter of credit serving as a direct credit substitute (credit conversion factor 100%). The counterparty is a corporate (100% risk weight). Separately, the bank has a USD 80 million swap with a current replacement cost of USD 2 million and add-on of USD 3 million with a corporate counterparty. Under Basel I's current exposure method, what is the total risk-weighted asset amount for these two items?

The standby letter of credit converts fully, giving 100 million of risk-weighted assets. The swap's credit equivalent is replacement cost plus add-on, 5 million, at a 100% weight. The total is 105 million dollars, not based on swap notional.

  1. AUSD 105.0 millionCorrect
  2. BUSD 102.0 million
  3. CUSD 180.0 million
  4. DUSD 100.0 million

Explanation

Standby LC: 100 x 100% x 100% = 100 million. Swap credit equivalent = replacement cost 2 + add-on 3 = 5 million, times 100% weight = 5 million. Total = 105 million. Using only replacement cost gives 102; using the notional of the swap gives 180.

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