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CMA Final · Risk Management in Banking and Insurance · Operational Risk and Off-Balance Sheet Risk

A bank issues a performance guarantee with a notional amount of Rs 200 crore. Under the RBI capital adequacy framework the credit conversion factor for this item is 50%, and the counterparty corporate has a risk weight of 100%. What is the risk-weighted asset amount, and what capital is needed at 9% minimum capital ratio?

RWA is Rs 100 crore and required capital is Rs 9 crore. The off-balance sheet guarantee is first converted to a credit equivalent using the 50% factor, giving Rs 100 crore, then weighted at 100%, and 9% of that gives Rs 9 crore.

  1. ARWA Rs 100 crore; capital Rs 9 croreCorrect
  2. BRWA Rs 200 crore; capital Rs 18 crore
  3. CRWA Rs 100 crore; capital Rs 18 crore
  4. DRWA Rs 50 crore; capital Rs 4.5 crore

Explanation

Credit equivalent amount = 200 x 50% = Rs 100 crore. RWA = 100 x 100% = Rs 100 crore. Capital = 9% x 100 = Rs 9 crore. Rs 200 crore RWA ignores the conversion factor, which is the key error for off-balance sheet items.

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