FRM II-BASEL 2

anbu.edu
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Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm

FRM II-BASEL 2

Postby anbu.edu » Tue Nov 11, 2014 11:15 am

If a bank retains the equity (junior) tranche of a securitization where the notional of
the tranche is $10 million and the tranche has a long-term “B-” credit rating, what is the
capital charge under the standardized approach for securitization exposures?
a) $400,000
b) $800,000
c) $1.2 million
d) $10 million

B+ and below rated securitizations are DEDUCTED while implies a 1,250% risk weight such
that CRC = $10 MM * 12.5 * 8% = $10 million; i.e., capital equal to the full notional

I think the answer is wrong.. it should be 10*1.5*.08=1.2mil
Can you suggest why this ans is correct

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

FRM II-BASEL 2

Postby edupristine » Wed Nov 12, 2014 5:30 am

You should remember that the junior tranche (B rated and below) in a securitized structure will always have a risk weight of 1250% (Reasoning provided above).
Basel 2 Capital charge is 8%.

Hence the risk capital should be Exposure*Risk weight* Basel 2 Capital Charge
= 10million*1250%*8% = 10 million


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