Question:

In the Standardized Approach to Credit Risk in the Basel II Accord, what is the regulatory capital charge for:

(i) $10 million AA rated corporate loan
(ii) Euro 100 million C rated corporate loan
(iii) $15 million UNRATED bank loan
(iv) AU 12 million AAA sovereign obligation

Answer:

If you would like to view a dynamic spreadsheet of the standardized grid, please refer to this EditGrid/XLS worksheet..
In that XLS, you can input the exposure type and the rating, and the risk weight is returned.

(i) AA rated corporate loan has a risk weight of 20%. Risk weighted assets (RWA) = 20% * $10 MM = $2 MM. Capital charge = 8% * $2 MM = $160,000. In summary, ($10 MM)(20%)(8%) = $160,000

(ii) C rated corporate loan has a risk weight of 150%. Risk weighted assets (RWA) = 150% * Euro 100 MM = Euro 150 MM. Capital charge = 8% * Euro 150 MM = Euro 12 MM. In summary, (Euro 150 MM)(150%)(8%) = Euro 12 MM

(iii) An unrated bank loan has a risk weight of 50% (or 100%). Risk weighted assets (RWA) = 50% * $15 MM = $7.5 MM. Capital charge = 8% * $7.5 MM = $600,000. In summary, ($15 MM)(50%)(8%) = $600,000

The alternative (Bank option #2) assigns the bank a risk weight based on the rating of the bank’s country.

(iv) AAA rated sovereign has a 0% risk weight. So the capital charge is zero.

Hi David,

Thanks for all your help throughout. Your brief videos on youtube are of great help.

Are you not providing answers to these questions?

Are AIMs available for BASEL readings? What should we read in those suggested readings?
I am not a basel practitioner nor I am in any bank. So are we supposed to study that 375 pager book?
Please suggest something about Basel readings.

One more query apparently it looks that your screencasts are available as youtube videos. Is it so?
As I couldnt find few there.

Anil

Hi Anil,

Thanks, glad you find helpful. It is my pleasure to help....

Yes, as I write the question (truly) freshly, sometimes it takes a day or so to develop the answers to fresh questions. See above.

“Are AIMs available for BASEL readings?”
No. I admit it has been frustrating b/c I have had several conversation with my GARP contact about this. Basically, GARP forgot the Basel AIMs and it is too late to re-issue, etc. So, I am using last year’s AIMS. Which is fine since, you may see in the screencast, at at principles (high) level, really nothing has changed re: Basel II.

Re: Basel, did you get the newsletter? The powerpoint slides should be a good start?

Re: the 375 page book, you DO NOT NEED TO KNOW all of the details. See the study notes, look at the slides, and please take the blog. I will cover more in the blog. But the two other readings are HIGHLY RECOMMENDED; i.e., credit concentration and the IRB function (it is difficult, but informative).

(the youtube are just inferior duplicates of what i put on the blog..)

Thanks, David