The  exposure  of  the  residential  mortgage  loan  portfolio  of  the  bank  is  reported  at  $135,000 million. The probability of default over the next year is estimated at 0.5% and the probability of default over the next 15 years is estimated at 4%. The estimated recovery value in case of default is 70% before insurance against default is taken by the lender. 20% of the portfolio is covered by a risk-free insurance firm.



(a) Compute the expected loss of the bank's mortgage portfolio.  (10 marks)





The risk-weight of the mortgage portfolio is 20%. Aside from the mortgage portfolio, the bank has  $55,000  millions  of  RWA  over  its  corporate  and investment  banking  business  unit  and lesser  portfolios.  The  bank  common  equity  is  $12  billion.  The  bank  has  issued  $2  billion  in eligible preferred stocks and another $1 billion in contingent convertibles. The bank has finally $5 billion in subordinated debt, half of them qualifying for capital recognition.



(b) Compute the  %  total  capital  ratio  of  the  bank,  differentiate  the  different  tiers  and appraise whether the financial institution is adequately capitalised. (15 marks)



You  have  read  about  the  concept  of  "Black  Swan".  You  now  wonder  if  the  COVID-19 pandemic could be described as a typical Black Swan event.



(c) Indicate the  key  criteria  of  a  Black  Swan  event  and  the  differences with  those  of  a known event or an extreme yet plausible event. (10 marks)



(d) Demonstrate whether the sudden spread of the COVID-19 pandemic can be defined as a Black Swan event. (15 marks)