Module: | MODULE B: RISK MANAGEMENT
Q308: Scenario: A corporate borrower takes a loan of ₹ 10 Crore secured fully by a bank deposit of ₹ 10 Crore maintained with the lending bank itself. Based on the Simple Approach for Credit Risk Mitigation under Basel II, consider the following statements:
1. The bank must apply a 100 percent risk weight to the entire exposure since it is fundamentally a corporate loan.
2. The risk weight of the collateral completely substitutes the risk weight of the corporate borrower for the secured portion.
3. The resultant risk weight applied to this fully secured exposure will be zero percent.
Which of the statements given above is/are correct?
2. The risk weight of the collateral completely substitutes the risk weight of the corporate borrower for the secured portion.
3. The resultant risk weight applied to this fully secured exposure will be zero percent.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is incorrect: Under the Simple Approach for Credit Risk Mitigation (CRM), you do not apply the original risk weight to the secured portion of the exposure.
Statement 2 is correct: The defining mechanic of the Simple Approach is "Substitution." The risk weight of the underlying exposure (the corporate borrower, typically 100%) is substituted entirely by the risk weight of the eligible collateral.
Statement 3 is correct: A bank deposit maintained with the lending bank itself is considered a risk-free collateral in this context, carrying a 0% risk weight.
Because the ₹ 10 Crore loan is fully secured by the ₹ 10 Crore deposit, the 0% risk weight substitutes the corporate risk weight, making the resultant capital charge requirement zero.
Statement 2 is correct: The defining mechanic of the Simple Approach is "Substitution." The risk weight of the underlying exposure (the corporate borrower, typically 100%) is substituted entirely by the risk weight of the eligible collateral.
Statement 3 is correct: A bank deposit maintained with the lending bank itself is considered a risk-free collateral in this context, carrying a 0% risk weight.
Because the ₹ 10 Crore loan is fully secured by the ₹ 10 Crore deposit, the 0% risk weight substitutes the corporate risk weight, making the resultant capital charge requirement zero.