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

A bank holds the following on-balance-sheet assets: $200 million of OECD government bonds (0% risk weight), $300 million of residential mortgages (50%), and $500 million of corporate loans (100%). Applying Basel I rules, what is the minimum total capital requirement?

Risk-weighted assets are $650 million (zero for government bonds, $150 million for mortgages, $500 million for corporate loans). At the 8% Basel I minimum, required capital is $52 million. Applying 8% to unweighted total assets would wrongly give $80 million.

  1. A$52 millionCorrect
  2. B$40 million
  3. C$80 million
  4. D$65 million

Explanation

RWA = 200×0 + 300×0.5 + 500×1.0 = 0 + 150 + 500 = $650 million. Capital = 8% × 650 = $52 million. Using total assets of $1,000 million gives $80 million, which ignores risk weights.

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