CMA Final · Risk Management in Banking and Insurance · Operational Risk and Off-Balance Sheet Risk
A bank issues a guarantee for Rs 50 lakh where it is a direct credit substitute, and the applicable credit conversion factor is 100%. The counterparty risk weight is 50%. The risk-weighted asset for this off-balance sheet item is:
The risk-weighted asset is Rs 25 lakh. The guarantee is converted to a credit equivalent at 100%, giving Rs 50 lakh, and this is multiplied by the 50% risk weight of the counterparty. Ignoring the risk weight would wrongly give Rs 50 lakh.
- ARs 50 lakh
- BRs 100 lakh
- CRs 25 lakhCorrect
- DRs 12.5 lakh
Explanation
Credit equivalent = 50 lakh x 100% = 50 lakh. RWA = 50 lakh x 50% = Rs 25 lakh. Rs 50 lakh ignores the risk weight. Rs 12.5 lakh wrongly applies a further 50% factor.
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