Dear David,
I saw from your Operational Risk Question and Answer - question B 3 that the amount of deposits required to fund a bank loan is calculated as the total bank loan principal minus the dedicated economic capital. I don't quite understand this equation because in my view, economic capital is an additional capital cushion set aside as a buffer for potential loan losses and therefore EC should be "independent" or "separated" from the loan being protected. In the scenario where a loan defaults with recovery of 0%, the EC, being set up as one part of original funding, should be gone as well! And this results in a situation whereby EC does not have any cushion effect.
Thank you for your enlightenment!
Cheers!
Liming
18/10/09
I saw from your Operational Risk Question and Answer - question B 3 that the amount of deposits required to fund a bank loan is calculated as the total bank loan principal minus the dedicated economic capital. I don't quite understand this equation because in my view, economic capital is an additional capital cushion set aside as a buffer for potential loan losses and therefore EC should be "independent" or "separated" from the loan being protected. In the scenario where a loan defaults with recovery of 0%, the EC, being set up as one part of original funding, should be gone as well! And this results in a situation whereby EC does not have any cushion effect.
Thank you for your enlightenment!
Cheers!
Liming
18/10/09
