You are reviewing the residential mortgage loan portfolio of a well-known Singapore-based bank. The purpose of your analysis is to establish the capital adequacy of the institution and its ability to withstand a major crisis.

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)