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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 a EUR 10 million unsecured loan to a corporate borrower rated BBB+ by an eligible external credit assessment institution. Using the Basel II corporate risk weight table (AAA to AA-: 20%; A+ to A-: 50%; BBB+ to BB-: 100%; below BB-: 150%; unrated: 100%), and the 8% minimum capital ratio, what is the minimum capital requirement for this exposure?

The minimum capital is EUR 0.8 million. A BBB+ corporate exposure carries a 100% risk weight under the Basel II standardized approach, giving risk-weighted assets of EUR 10 million, and the 8% minimum capital ratio applied to that amount produces EUR 0.8 million.

  1. AEUR 0.4 million
  2. BEUR 0.8 millionCorrect
  3. CEUR 1.2 million
  4. DEUR 0.5 million

Explanation

BBB+ falls in the 100% risk weight bucket. RWA = 10m x 100% = 10m. Capital = 8% x 10m = EUR 0.8m. The EUR 0.4m option wrongly uses a 50% weight (the A bucket), and EUR 1.2m uses 150%.

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