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60. Question A risk analyst at a financial institution is preparing a report on...

Aug 20, 2024

Solution by Steps

step 2

Option A states that regulatory capital for credit risk is designed to cover a loss expected to be exceeded only once every ten years. This is not accurate as regulatory capital is typically based on a more frequent loss expectation

step 3

Option B claims that regulatory capital is referred to as going concern capital because it absorbs losses while the bank is still in business. This is a correct statement as regulatory capital is indeed meant to support the bank's operations during financial stress

step 4

Option C suggests that the most important capital for a bank is regulatory capital, equating it to the bank's estimate of expected losses. This is misleading as regulatory capital is not solely based on expected losses but also on regulatory requirements

step 5

Option D describes economic capital as an internal risk measure ensuring a company remains solvent with high confidence. This is also correct, but it does not directly address the regulatory capital aspect as required by the question

step 6

After evaluating all options, the most accurate statement to include in the report is Option B

Key Concept

Regulatory Capital vs. Economic Capital

Explanation

Regulatory capital is designed to absorb losses while a bank is operational, ensuring stability, whereas economic capital is an internal measure reflecting the risk profile of the institution.