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

A bank under Basel I has a $100 million undrawn commitment to a corporate client with an original maturity of 3 years, and a $50 million standby letter of credit that backs the client's financial obligations. Using a 50% credit conversion factor for the commitment and 100% for the standby letter of credit, with a 100% counterparty risk weight, what is the total risk-weighted amount for these two items?

The commitment converts to $50 million at a 50% factor and the standby letter of credit to $50 million at 100%. With a 100% risk weight, the total risk-weighted amount is $100 million. Treating the commitment at full face value would overstate it at $150 million.

  1. A$100 millionCorrect
  2. B$150 million
  3. C$75 million
  4. D$50 million

Explanation

Commitment: 100 × 50% = $50 million credit equivalent. Standby letter of credit: 50 × 100% = $50 million. Both are weighted at 100%, so RWA = 50 + 50 = $100 million. $150 million wrongly converts the commitment at 100%.

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