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FRM Part II · FRM Exam Part II · Capital Structure in Banks

A bank has two business units. Unit A has standalone economic capital of 60 million and Unit B has 40 million. Because of diversification, total bank economic capital is 80 million. If the bank allocates diversification benefit pro rata to standalone capital, what is Unit A's allocated capital?

Unit A is allocated 48 million. Standalone capital totals 100 million but diversified bank capital is 80 million, so each unit is scaled by 0.8. Unit A's 60 million standalone becomes 48 million under pro rata allocation of the diversification benefit.

  1. A48 millionCorrect
  2. B60 million
  3. C40 million
  4. D52 million

Explanation

Standalone sum is 100 million versus 80 million, so the scaling factor is 0.8. Unit A gets 60 x 0.8 = 48 million and Unit B gets 32 million, which sum to 80. Using 60 ignores diversification.

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