under the irb a approache of basel ii a bank loan of 1 million granted to a corporate rated bbb

1. Under the IRB-A approach, the Risk-Weighted Assets (RWA) is calculated by multiplying the loa

Question

Under the IRB-A approach of Basel II, a bank loan of $1 million granted to a corporate rated BBB by Moody's has an estimated risk-weight of 17.4% if the Loss Given Default (LGD) is 10%. For the same credit, if the LGD parameter were higher, say 50%, the estimated risk-weight would have been 87.1%. Compute the RWA in both cases. What should be the minimum capital requirement in both cases? Compare the results with the minimum capital requirement computed for the same loan under (1) the Standardized Approach of Basel II; and (2) the Basel I capital accord. Conclude and discuss.

          Under the IRB-A approach of Basel II, a bank loan of $1 million granted to a corporate rated BBB by Moody's has an estimated risk-weight of 17.4% if the Loss Given Default (LGD) is 10%. For the same credit, if the LGD parameter were higher, say 50%, the estimated risk-weight would have been 87.1%. Compute the RWA in both cases. What should be the minimum capital requirement in both cases? Compare the results with the minimum capital requirement computed for the same loan under (1) the Standardized Approach of Basel II; and (2) the Basel I capital accord. Conclude and discuss.

Added by Kathleen S.

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