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Answer: EUR 9.62 million
The correct estimate of the Basel II credit risk capital that the bank should reserve for this portfolio is EUR 9.62 million. This is calculated using the Basel II IRB approach, which requires the formula: (Exposure at Default * Loss given Default * DR99.9) - Expected Loss. In this case, DR99.9 represents the worst-case default rate for the portfolio, which is calculated using the Vasicek model and assumes a correlation of 0.04 between defaults on individual exposures. The loss given default is determined by subtracting the expected recovery rate from 1, yielding 70%. Applying the formula, the capital required is calculated as (200 * 70% * 9.87%) - 4.2 million, which equals EUR 9.62 million. This corrects the errors found in the other options provided, which either use incorrect default rates, incorrectly apply the recovery rate instead of the loss given default, or fail to subtract the expected loss.
Author: LeetQuiz Editorial Team
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A regulatory analyst at a major bank is compiling a report on the bank's credit risk capital for the current year, employing the Basel II IRB approach to perform the calculation. As part of this process, the analyst identifies a portfolio of credit exposures with equal values, held by borrowers sharing the same probability of default. The analyst has gathered the following details regarding the portfolio:
| Exposure at default | EUR 200 million |
|---|---|
| 1-year expected loss on the portfolio | EUR 4.2 million |
| Expected recovery rate on a defaulted credit | 30.00% |
| 1-year portfolio default rate at the 95th percentile | 5.66% |
| 1-year portfolio default rate at the 99.9th percentile | 9.87% |
What is the correct estimate of the Basel II credit risk capital that the bank should reserve for this portfolio?
A
EUR 3.72 million
B
EUR 5.92 million
C
EUR 9.62 million
D
EUR 13.82 million
