## FRM II-BASEL 2

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

### FRM II-BASEL 2

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: 704
Joined: Wed Apr 09, 2014 6:28 am

### FRM II-BASEL 2

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