Answer-first summary for fast verification
Answer: EUR 9.62 million
## Explanation The correct Basel II IRB credit risk capital for the portfolio is calculated using the formula: **Capital = (Exposure at Default × Loss Given Default × DR₉₉.₉) - Expected Loss** Where: - **DR₉₉.₉** is the worst-case default rate at the 99.9th percentile (9.87%) - **Loss Given Default (LGD)** = 1 - Recovery Rate = 1 - 30% = 70% ### Calculation: 1. **Exposure at Default × LGD × DR₉₉.₉** = 200 million × 70% × 9.87% = 200 × 0.70 × 0.0987 = EUR 13.82 million 2. **Subtract Expected Loss** = 13.82 million - 4.2 million = **EUR 9.62 million** ### Why other options are incorrect: - **A (EUR 3.72 million)**: Uses the 95th percentile default rate (5.66%) instead of the 99.9th percentile - **B (EUR 5.92 million)**: Uses recovery rate instead of loss given default and forgets to subtract expected loss - **D (EUR 13.82 million)**: Forgets to subtract the expected loss from the calculation This calculation follows the Basel II Internal Ratings-Based (IRB) approach for credit risk capital, which requires banks to hold capital for unexpected losses at a 99.9% confidence level, minus expected losses that are already provisioned for.
Author: LeetQuiz .
Ultimate access to all questions.
A regulatory analyst at a large bank is preparing a report of the bank's credit risk capital for the current year and uses the Basel II IRB approach for making the calculation. As part of this process, the analyst identifies a portfolio of credit exposures of equal size that are held by borrowers with the same probability of default. The analyst has collected the following information about 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
No comments yet.