Schroeck, Chapter 5: Capital Structure in Banks Study Notes contain 13 pages covering the following learning objectives:

* Evaluate a bank’s economic capital relative to its level of credit risk

* Identify and describe important factors used to calculate economic capital for credit risk: probability of default, exposure, and loss rate.

* Define and calculate expected loss (EL).

* Define and calculate unexpected loss (UL).

* Estimate the variance of default probability assuming a binomial distribution.

* Calculate UL for a portfolio and the risk contribution of each asset.

* Describe how economic capital is derived.

* Explain how the credit loss distribution is modeled.

* Describe challenges to quantifying credit risk.

After reviewing the notes you will be able to apply what you learned with practice questions and answers.

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