*Learning Objectives: Explain the distinctions between economic capital and regulatory capital and describe how economic capital is derived. Describe the degree of dependence typically observed among the loan defaults in a bank’s loan portfolio and explain the implications for the portfolio’s default rate. Estimate the mean and standard deviation of credit losses assuming a binomial distribution.*

**Questions:**

24.14.1.A bank has a $20,000,000 portfolio of loans. The portfolio has a probability of default of 0.6%, a correlation parameter of 0.3, and a recovery rate of 40%. Using the Vasicek model and the 99.9 percentile of the default rate, what is closest to the required regulatory capital?

24.14.1.

a. 1,891,800

b. 9,459,000

c. 2,035,800

d. 1,261,200

**24.14.2.**When using the Vasicek model during the financial crisis in 2008, how would the model have accounted for the economic conditions?

a. The Vasicek model uses interest rates as a proxy for the general health of the economy.

b. The Vasicek model does not specifically account for the current health of the economy.

c. The Vasicek model would account for a recession with a low F variable in Vasicek’s default rate model.

d. The Vasicek model would account for a recession with a high F variable in Vasicek’s default rate model.

**24.14.3.**A bank has a portfolio that consists of 1,000 loans that are each worth $5 million, and each has a 2% probability of default over the next year. The recovery rate is assumed to be 60% with a correlation coefficient of 0.2. Determine the standard deviation,

**α,**of the loss for the loan portfolio as a percentage of its total value.

a. 0.0267

b. 0.0145

c. 0.0307

d. 0.0180

**Answers here:**