What is the capital requirements for this portfolio

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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 requirements. During normal times, the bank estimates the risk parameters as PD=1%, LGD=20%, EAD=$2billion, 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 25%. If everything else is equal during downturn, what is the capital requirements for this portfolio? How about Risk Weighted Assets (RWA)? Please explain briefly the relationship between Expected Loss, Unexpected Loss, Capital Requirement, and WA using this example.

Reference no: EM133278097

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