CMA Final · Risk Management in Banking and Insurance · Credit Risk Management
Under the Basel framework's standardised approach to credit risk, a bank holds a Rs 200 crore unsecured corporate loan carrying a risk weight of 100%. The bank must maintain a minimum total capital ratio of 9% of risk-weighted assets. What is the minimum capital the bank must hold against this loan alone?
Risk-weighted assets are the exposure multiplied by the risk weight, which is Rs 200 crore at 100%. The minimum capital is 9% of that amount, so Rs 18 crore. The other figures come from misapplying the ratio or the risk weight.
- ARs 9 crore
- BRs 18 croreCorrect
- CRs 22 crore
- DRs 180 crore
Explanation
Risk-weighted asset = Rs 200 crore x 100% = Rs 200 crore. Capital required = 9% x Rs 200 crore = Rs 18 crore. Rs 9 crore would result from halving the risk weight wrongly, Rs 22 crore from dividing by 9%, and Rs 180 crore from deducting 9% from the exposure.
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