Explanation

Correct Answer: C

This question demonstrates the regulatory capital calculation under the Basel framework:

Formula Components:

• WCDR (Worst-Case Default Rate): 12.01% - Stress scenario default probability
• PD (Probability of Default): 0.75% - Long-run average default probability
• EAD (Exposure at Default): $100 million - Credit exposure
• LGD (Loss Given Default): 70% (1 - 30% recovery rate)

Calculation: (12.01\% - 0.75\%) \times 100,000,000 \times 70\% = 11.26\% \times 100,000,000 \times 0.70 = \`$7`,882,000

Interpretation:

• The difference (WCDR - PD) represents unexpected losses
• Regulatory capital covers unexpected losses beyond expected losses
• This ensures banks maintain adequate capital buffers for stress scenarios