P2.T7.24.10 Evolution of risk capital measures.

Nicole Seaman

Director of CFA & FRM Operations
Staff member
Subscriber
Learning Objectives: Explain the calculation of risk-weighted assets and the capital requirement per the original Basel I guidelines. Describe measures introduced in the 1995 & 1996 amendments, including guidelines for netting of credit exposures & methods to calculate market risk capital for assets in the trading book. Calculate credit risk capital under Basel II utilizing the IRB approach.

Questions:

24.10.1.
An analyst at Bank DeNiro has been tasked with calculating the Risk-Weighted Assets (RWA) under the Basel I framework and reporting on how they would differ under Basel II. Below are the assets listed on its balance sheet:

P2-T7-24_10-1Q.png


Using the provided Basel I risk weights, calculate the total Risk-Weighted Assets (RWA) under Basel I and select the option that correctly compares it to the potential RWA under Basel II.

a. RWA under Basel I is $125 million, whereas under Basel II it would be lower.
b. RWA under Basel I is $67.5 million, whereas under Basel II it would be higher.
c. RWA under Basel I is $135 million, whereas under Basel II it would be lower.
d. RWA under Basel I is $100 million, whereas under Basel II it would be higher.


24.10.2. A bank has the following counterparty exposures.

P2-T7-24_10-2Q.png


Which of the below statements is most correct?

a. The credit exposure with netting is $5 million; without netting, it is $20; the NRR approximates to 0.25, and the CEA approximates £33.05 million.
b. The credit exposure with netting is $5 million; without netting, it is $20 million; the NRR approximates to 0.25, and the CEA approximates to 28.05
c. The credit exposure with netting is $5 million; without netting, it is $20 million; the NRR approximates to 0.25, and the CEA approximates to $51 million.
d. The credit exposure with netting is $31 million; without netting, it is $51 million; the NRR approximates to 0.25, and the CEA approximates to $33.05 million


24.10.3. Bank Fortuna is assessing the credit risk capital required for a particular retail loan portfolio under the Basel II IRB approach. The following parameters are given for the loan that has a maturity of 1 year:

P2-T7-24_10-3Q.png


* MA = 1 + b(M-2.5)/(1-1.5b). However, under the Internal Ratings-Based (IRB) approach, retail exposures generally do not require a maturity adjustment (MA) because the MA is automatically set to 1.

Calculate the Risk-Weighted Assets (RWA) under the Basel II IRB approach and identify the most accurate estimation.

a. RWA is $140m
b. RWA is $35m,
c. RWA is $400m
d. RWA is $2.8m

Answers here:

 
Last edited:

aedris

New Member
Subscriber
Hi! Apologies, are the solutions for 24.10.2 a misprint? I can't get to any of those answers, with netting I have a remaining exposure to counterparty 1 of 30 and to counterparty 2 of 15, am I looking at this the wrong way? Thanks in advance!
 

Clay Carter

Senior Content Developer, FRM, CFA, CAIA, CIPM
Staff member
Subscriber
Hi! Apologies, are the solutions for 24.10.2 a misprint? I can't get to any of those answers, with netting I have a remaining exposure to counterparty 1 of 30 and to counterparty 2 of 15, am I looking at this the wrong way? Thanks in advance!
@EBarl6236 Please see the above link to the solutions (In forum). If you are having trouble feel free to ask a question in there and tag me so I'll respond.
 
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