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IAI Actuarial Core Principles · Business Economics · Role, structure and stability of the financial system

A bank has capital of ₹90 crore and risk-weighted assets of ₹900 crore. The regulator raises the minimum capital ratio from 9% to 12%. If the bank cannot raise any new capital, what is the maximum risk-weighted assets it can hold, and by how much must it reduce them?

Maximum risk-weighted assets are ₹750 crore, found by dividing capital of ₹90 crore by the new 12% requirement. Since current holdings are ₹900 crore, the bank must reduce them by ₹150 crore if it cannot raise new capital.

  1. A₹750 crore; reduction ₹150 croreCorrect
  2. B₹800 crore; reduction ₹100 crore
  3. C₹750 crore; reduction ₹100 crore
  4. D₹1,000 crore; reduction nil
  5. ₹720 crore; reduction ₹180 crore

Explanation

Maximum RWA = capital / required ratio = 90 / 0.12 = ₹750 crore. The current ratio is 90/900 = 10%, so it was compliant before. Reduction needed = 900 - 750 = ₹150 crore. Using 9% gives ₹1,000 crore, which is the old limit and is wrong.

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