Financial Risk Manager Part 2

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Explanation:

Under the Basel framework for large exposures, a bank must aggregate all types of on- and off-balance sheet exposures to a single counterparty to measure concentration risk against regulatory limits. This explicitly includes OTC derivative exposures, such as a commodity swap position with the counterparty (Option C), which must be measured (e.g., using SA-CCR) and included in the single counterparty exposure limits.

Option A is incorrect because a 10% to 15% ownership stake does not typically constitute control or form a "group of connected clients" requiring exposure aggregation (which normally requires >50% ownership or outright voting control).
Option B is incorrect because a guarantee shifts the exposure from the underlying client (VH3) to the guarantor (the insurer) under the substitution approach, hence reducing the calculated exposure to VH3.
Option D is incorrect as exposures to the bank's own affiliates are treated separately and do not constitute direct exposure to VH3.

Explanation:

Option A is incorrect because a 10% to 15% ownership stake does not typically constitute control or form a "group of connected clients" requiring exposure aggregation (which normally requires >50% ownership or outright voting control).
Option B is incorrect because a guarantee shifts the exposure from the underlying client (VH3) to the guarantor (the insurer) under the substitution approach, hence reducing the calculated exposure to VH3.
Option D is incorrect as exposures to the bank's own affiliates are treated separately and do not constitute direct exposure to VH3.

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Question The chief credit officer (CCO) of a bank is preparing for a discussion with the CRO on the bank’s large exposures to a recently failed corporate client, VH3 Limited. In the last quarterly report prior to VH3’s troubles, the bank had outstanding loans to VH3 of USD 7.5 billion, which is within the 15% of capital lending limit imposed by bank regulators, and an expected loss on the secured loan of less than USD 0.75 billion. The CCO and CRO noticed that recently updated data showed the bank having total claims in bankruptcy against VH3 of USD 10 billion, or 20% of capital, which exceeds regulatory single counterparty exposure limits, and a likely loss of nearly USD 4 billion. Which of the following exposures should have been captured in the calculation of risk relating to VH3 to comply with single client regulatory limits?

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Last updated: July 5, 2026 at 07:28

Loans to companies in which VH3 has a 10% to 15% ownership position

Exposures to insurers who have issued guarantees for the obligations of VH3

A commodity swap position with VH3 where the bank is the fixed-price receiver

Claims on affiliates of the bank that have exposures to VH3