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

Under the 1988 Basel Accord, a bank has EUR 200 million of corporate loans (100% weight), EUR 100 million of residential mortgages (50% weight) and EUR 50 million of claims on an OECD government (0% weight). Which is the minimum capital at the 8% ratio?

Risk-weighted assets are 200 + 50 + 0 = 250 million euros. At the 8% minimum ratio, required capital is 20 million euros. The mortgage is weighted at 50% and the OECD government claim at 0%.

  1. AEUR 16.0 million
  2. BEUR 20.0 millionCorrect
  3. CEUR 28.0 million
  4. DEUR 14.0 million

Explanation

RWA = 200 + 50 + 0 = 250 million. Capital = 8% x 250 = EUR 20.0 million. EUR 16 million ignores the mortgage; EUR 28 million applies 100% to the mortgage and government claims (350 x 8%); EUR 14 million omits the corporate loan's full weight.

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