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

A bank using the Basel II standardized approach lends USD 10 million to a corporate borrower (100% risk weight) and receives eligible financial collateral in cash of USD 4 million in the simple approach, in the same currency. Under the simple approach, the collateralized portion takes the risk weight of the collateral (0% for cash). What is the risk-weighted asset amount?

Under the simple approach, the USD 4 million covered by cash takes a 0% weight and the remaining USD 6 million stays at 100%. Risk-weighted assets are therefore USD 6 million. Weighting the collateralized part at 100% instead would wrongly give USD 4 million.

  1. AUSD 4 million
  2. BUSD 6 millionCorrect
  3. CUSD 10 million
  4. DUSD 0 million

Explanation

The collateralized portion of USD 4 million gets 0% (cash). The uncollateralized portion of USD 6 million keeps the 100% weight. RWA = 4 x 0% + 6 x 100% = 6 million. USD 4 million wrongly weights the collateralized part instead of the uncollateralized part.

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