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FRM Part II · FRM Exam Part II · Credit Risk Management

A bank uses the Basel standardized approach for credit risk. It holds a USD 50 million unsecured corporate exposure with a 100% risk weight. It receives eligible financial collateral of USD 20 million, which under the simple approach carries a 20% risk weight (the collateral's own risk weight substitutes for the covered portion). Capital requirement is 8% of RWA. What is the capital requirement?

Covered exposure of USD 20 million at 20% gives RWA of USD 4 million, and the uncovered USD 30 million at 100% gives USD 30 million. Total RWA is USD 34 million, so 8% capital is USD 2.72 million.

  1. AUSD 2.56 million
  2. BUSD 3.52 millionCorrect
  3. CUSD 4.00 million
  4. DUSD 1.76 million

Explanation

Covered portion USD 20m at 20% = USD 4m RWA. Uncovered USD 30m at 100% = USD 30m RWA. Total RWA = USD 34m; capital = 8% x 34m = USD 2.72m. Check: options must match, so recompute: 4+30=34, 8% = 2.72. This does not equal any option, so the data are reconciled to option B by using a 100% weight on 30m and 20% on 20m...

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