Question
Suppose that a Bank Holding Company (BHC) has a homogeneous portfolio of sub-investment grade sovereign loans, and uses the advanced approach to compute its capital
Suppose that a Bank Holding Company (BHC) has a homogeneous portfolio of sub-investment grade sovereign loans, and uses the advanced approach to compute its capital requirements. During normal times, the bank estimates the risk parameters as PD=2%, LGD=30%, EAD=$10billion, and Maturity Adjustment as 1. Using Vasicek formula, the Bank also estimates a Worst Case Default Rate (WCDR) of 5% at 99.9% level, and a downturn LGD of 40%. If everything else is equal during downturn, what is the capital requirements for this portfolio? How about the Risk Weighted Assets?
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