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

A bank uses the standardized approach. It has a EUR 40 million unrated corporate loan (100% risk weight) and a EUR 20 million loan to a corporate rated AA- (20% risk weight). Assuming the minimum total capital requirement of 8% of risk-weighted assets and no other exposures or mitigation, what is the minimum capital required?

Risk-weighted assets are 40 million at 100% plus 20 million at 20%, giving 44 million. Multiplying by the 8% minimum requirement yields 3.52 million euros. Applying 8% to the unweighted 60 million exposure would wrongly give 4.8 million.

  1. AEUR 3.52 million
  2. BEUR 3.84 millionCorrect
  3. CEUR 4.00 million
  4. DEUR 4.80 million

Explanation

RWA = 40 x 100% + 20 x 20% = 40 + 4 = 44 million. Capital = 8% x 44 = 3.52 million. Check: 3.2 + 0.32 = 3.52. EUR 4.8 million wrongly applies 8% to the 60 million unweighted total, and EUR 3.84 is not the result either way.

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