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

A bank under the original 1988 Basel Accord holds a EUR 200 million unrated corporate loan, a EUR 100 million residential mortgage loan fully secured by the borrower's home, and EUR 50 million of claims on an OECD central government. Using the Basel I risk weights (corporate 100%, residential mortgage 50%, OECD government 0%), what is the minimum total capital required at the 8% ratio?

Risk-weighted assets are 200 plus 50 plus zero, or 250 million euros. Applying the 8% minimum ratio gives 20 million euros of required capital. The government claim carries a 0% weight, so it adds nothing to required capital.

  1. AEUR 16.0 millionCorrect
  2. BEUR 20.0 million
  3. CEUR 28.0 million
  4. DEUR 14.0 million

Explanation

Risk-weighted assets = 200x1.00 + 100x0.50 + 50x0 = 250 million. Capital = 8% x 250 = EUR 20.0 million. Check: 16 + 4 + 0 = 20. Wait, 8% of 200 is 16, 8% of 50 is 4, total 20. So the key is the 20.0 option.

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