Q. 12 of 2012 GARP practice exam Part 2

[crablegs]

Hello,

Was wondering if anyone already went through Q.#12 of the 2012 GARP practice exam (Part II)? When calculating total risk-weighted assets, why is the sum of CRm & CRo multiplied by a factor of 12.5?

Thank you,

 

[sl]

It is done to make the MRC+ORC credit equivalent. When you multiply it by 8% to find the Total capital, it cancels out.

 

[crablegs]

Makes sense! Thank you!

 

[David Harper CFA FRM]

exactly, to spell out laxmsun's reply: the total charge takes 8% of RWA, so it's taking 8%*[MRC*12.5] = (12.5%*8%) * MRC = 1.0* MRC; i.e., 12.5 is the reciprocal of 8%

 

[crablegs]

Thank you. And I actually now found this section in the readings. Must have skipped that part......