Question

1. Answer the following according to Basel I and II:

a)	We are considering the capital for line of credit to non-financial. The contract amount at risk is $100, credit conversion factor is 0.5, risk weight is 0.75, and capital requirement is 8% of risk-adjusted asset. What is the amount of capital requirement according to Basel I and II?

b)	We are considering the capital for government securities. The amount is 0 and capital requirement is 8% of risk-adjusted asset. What is the amount of capital requirement according to Basel I and II?

Answer 1

total capital/ risk weighted exposures = 8%
total capital= risk weighted exposures * 8%

Asset	Risk weights	Credit conversion factor	Amount of assets	Risk weighted asset value
Government treasury	0%	0%	0	0
non-financial corporate	75%	50%	100	37.5

Risk weighted asset value (exposure)   = amount*risk weight*credit factor
  
For non-financial  
total capital = 37.5*8%  
3.00   
  
For government securities  
total capital = 0*8%  
0.00  
  
Notes-  
Risk weights home country for government securities is zero. Hence, they are not considered as a part of risk weighted assets (i.e. their risk weight is zero). There is no capital requirement for this in Basel 1 or 2  
Risk weights for non-financial/ corporates varies from 75% to 150% in some cases. Line of credit is usually an off-balance sheet item, as the liability may be contingent and fluctuating. The risk weight should be considered based on most prudent judgement. In this case, we will consider the weight and conversion factor as provided in the question.  
The capital requirement is a total capital inclusive of tier 1 and tier 2 capital. In Basel 3, the proportion tier 1 and tier 2 capitals is particularly specified. However, it is not required in this question.