Financial Risk Manager Part 2

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Explanation:

Under the Basel Large Exposures framework, all exposure types must be included when calculating the total exposure to a single counterparty. This includes OTC derivative positions (such as commodity swaps), loans, and debt/equity holdings. Option A is incorrect because minority stakes (10%-15%) typically do not trigger consolidation for counterparty limits (usually >50% ownership is required). Option B is incorrect as a guaranteed exposure generally shifts the exposure to the guarantor rather than the original counterparty. Option D is incorrect as claims on affiliates are not claims on VH3. Thus, the commodity swap should have been included.

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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 07:29

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