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

Under the Basel II standardized approach for credit risk, a bank holds an unsecured corporate loan of 10 million to a borrower rated A+ to A- by an eligible external rating agency (risk weight 50%). Using the 8% minimum capital ratio, what is the minimum regulatory capital for this exposure?

The minimum capital is 0.40 million. The exposure of 10 million is multiplied by the 50% risk weight to give 5 million of risk-weighted assets, and the 8% minimum capital ratio is then applied to that figure.

  1. A0.40 millionCorrect
  2. B0.80 million
  3. C0.50 million
  4. D4.00 million

Explanation

Risk-weighted assets = 10 million x 50% = 5 million. Capital = 8% x 5 million = 0.40 million. The 0.80 million option applies 8% to a 100% risk weight, ignoring the rating-based weight. The 4.00 million option forgets to apply the 8% ratio correctly (uses 80%).

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