CMA Final · Risk Management in Banking and Insurance · Operational Risk and Off-Balance Sheet Risk
A bank has issued a guarantee of Rs 50 crore in favour of a customer's supplier. The guarantee is a direct credit substitute carrying a credit conversion factor (CCF) of 100%. The counterparty risk weight is 80%. What is the risk-weighted asset amount for this item?
The risk-weighted asset is Rs 40 crore. The guarantee converts at 100% into a credit equivalent of Rs 50 crore, which is then multiplied by the 80% counterparty risk weight. Skipping the risk weight would wrongly give Rs 50 crore.
- ARs 50 crore
- BRs 40 croreCorrect
- CRs 25 crore
- DRs 20 crore
Explanation
Credit equivalent amount = 50 x 100% = Rs 50 crore. RWA = 50 x 80% = Rs 40 crore. Rs 50 crore ignores the risk weight; Rs 20 crore wrongly applies a 50% CCF and then 80%, giving 20.
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