Question

CDE Bank has the following credit exposures:

• Sovereign loans: $7M rated AA
• Business loans: $26M rated BBB
• Personal loans: $14M
• Residential mortgages: $18M with 50%-60% LTVs and $19M with LTVs <50%; 55% of these are rented out

What is the bank's credit risk RWA under the forthcoming SA?

Answer 1

Risk Weight : Risk of Non-Recoverability of a Credit Exposure

Risk Weight are Categorized on the Basis of Corporate and Non-Corporate Loans.

Calculation of Bank's Credit Risk RWA (Risk Weighted Assets):

Risk Weight (Generally in Percentage) * Credit Exposure

This Calculation will be done for Different Credit Segment indiviadually.
The Sum Total of all the Calculation will be the Overall Credit Risk RWA (Risk Weighted Assets)

Calculation of Risk Weighted Assets
Type of Credit	Credit Exposure	Risk Weight	Risk Exposure
Sovereign Loans (AA Rated)	$                             7,000,000.00	20%	$    1,400,000.00
Business Loans (BBB Rated)	$                           26,000,000.00	100%	$ 26,000,000.00
Personal Loans	$                           14,000,000.00	100%	$ 14,000,000.00
Residential Morgages
Rented Out	$                           20,350,000.00	35%	$    7,122,500.00
Others	$                           16,650,000.00	100%	$ 16,650,000.00
			$ 65,172,500.00

LTV (Loan to Value) also called as Margin Requirement

This is the Ratio of Loan Amount to Collateral. For Example : If John asks Banks for a Loan of $ 100,000 against a Property Mortgage valuing $500,000.

Then LTV is

Loan Amount / Value of Collateral
$ 100,000 / $500,000
20 %