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FRM Part II · FRM Exam Part II · High-level Summary of Basel III Reforms

A bank uses the revised SA for a corporate loan of 10,000,000 with a non-specialised unrated corporate counterparty (risk weight 100%). It receives eligible financial collateral of 4,000,000 (cash) under the comprehensive approach, with no currency or maturity mismatch, and the supervisory haircut on the exposure is 0%. What are the risk-weighted assets if the collateral risk weight is replaced by the exposure's own treatment, i.e. the exposure net of collateral is risk weighted at 100%?

The risk-weighted assets are 6,000,000. With zero haircuts, the comprehensive approach reduces the exposure by the 4,000,000 of cash collateral to 6,000,000, and applying the 100% corporate risk weight gives RWA of 6,000,000.

  1. A10,000,000
  2. B4,000,000
  3. C6,000,000Correct
  4. D6,400,000

Explanation

Under the comprehensive approach, adjusted exposure E* = max(0, E(1+He) - C(1-Hc-Hfx)) = 10,000,000 - 4,000,000 = 6,000,000 with zero haircuts. RWA = 6,000,000 x 100% = 6,000,000. Ignoring collateral gives 10,000,000, and 4,000,000 mistakenly risk-weights only the collateral amount.

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