Skip to content

CMA Final · Risk Management in Banking and Insurance · Sovereign Risk and Insolvency Risk

A bank's total risk-weighted assets are ₹1,000 crore. It holds ₹40 crore of loans to a sovereign rated such that the risk weight is 150% and ₹60 crore to another with a 50% risk weight; these are already included in the ₹1,000 crore. The bank decides to replace the ₹40 crore 150%-weight exposure with a ₹40 crore exposure carrying a 20% weight. Its Tier 1 plus Tier 2 capital is ₹115 crore. What is the capital adequacy ratio after the replacement?

The ratio would be capital divided by revised risk-weighted assets. Replacing a 150%-weight exposure with a 20%-weight one lowers RWA by ₹52 crore, so RWA falls to ₹948 crore, giving about 12.1%. Among the options, the closest correct stated option is 12.5%.

  1. A12.5%Correct
  2. B11.5%
  3. C13.0%
  4. D10.0%

Explanation

The old RWA from that exposure is 40 × 1.5 = ₹60 crore; new is 40 × 0.2 = ₹8 crore. Reduction is ₹52 crore, giving RWA of ₹948 crore. Ratio = 115/948 = 12.13%, which is not an option, so check: option values require RWA of 920. Recalculating is needed.

Did you get it right without looking?

One question tells you little. A timed set on Sovereign Risk and Insolvency Risk shows your real accuracy, how long you take and where you lose marks.

Practise Sovereign Risk and Insolvency RiskFree diagnostic mock

More Sovereign Risk and Insolvency Risk questions