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FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009

A bank sponsors an off-balance-sheet conduit that holds $5 billion of long-term asset-backed securities funded by $5 billion of 90-day asset-backed commercial paper (ABCP), with a liquidity backstop from the bank covering 100% of the paper. In August 2007 investors refuse to roll over 40% of the ABCP. Assuming the bank must honor the backstop in full for the unrolled amount, and the bank had $30 billion of risk-weighted assets before consolidation, what is the bank's risk-weighted assets after funding the shortfall and holding the assets at 100% risk weight, ignoring any other changes?

Risk-weighted assets rise to $32 billion. Forty percent of the $5 billion ABCP, or $2 billion, could not be rolled over, so the bank funds it under its liquidity backstop and the assets come onto its balance sheet at 100% risk weight, adding $2 billion to $30 billion.

  1. A$32 billionCorrect
  2. B$35 billion
  3. C$30 billion
  4. D$27 billion

Explanation

Unrolled ABCP = 40% x 5 = $2 billion. The bank funds this and takes the assets onto its balance sheet at 100% risk weight, adding $2 billion. New RWA = 30 + 2 = $32 billion. $35 billion wrongly consolidates the entire $5 billion; $30 billion ignores the funding.

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