FRM Part II · FRM Exam Part II · Governance
A bank's credit risk policy sets a single-name exposure limit of 10% of Tier 1 capital. Tier 1 capital is USD 2,000 million. Borrower Alpha has drawn loans of USD 120 million and undrawn committed facilities of USD 100 million with a credit conversion factor of 50%. A further USD 40 million of new drawn lending to Alpha is proposed. Using exposure at default (drawn plus CCF-weighted undrawn), what is the outcome of approving the new lending?
Total exposure at default would be USD 210 million: 120 drawn plus 50 from the CCF-weighted undrawn facility plus 40 new lending. This exceeds the USD 200 million limit, which is 10% of Tier 1 capital, by USD 10 million, so the approval would breach policy and need escalation or reduction.
- ATotal exposure of USD 210 million exceeds the USD 200 million limit by USD 10 millionCorrect
- BTotal exposure of USD 260 million exceeds the limit by USD 60 million
- CTotal exposure of USD 160 million is within the limit with USD 40 million headroom
- DTotal exposure of USD 190 million is within the limit with USD 10 million headroom
Explanation
Limit = 10% x 2,000 = 200. Existing EAD = 120 + 0.5 x 100 = 170. Adding 40 gives 210, which exceeds 200 by 10. Ignoring the CCF and counting full undrawn (260) overstates the breach; omitting undrawn (160) understates it.
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