Error in the slide about capital adequacy
In the slide talking about an example of a bank having $10 billion as capital and about the difference between Standardized Approach and Internal Ratings Based approach, the author erroneously says that under standardized approach, the said bank will be able to give only 8% of 75% of $10 bn as loans. Instead the statement should be that minimum capital adequacy amount that the bank needs to keep will be 8% of 75% of 10 bn and the rest can be given as loans.
Kindly correct my understanding if I am wrong
Have the same doubt
Bank has 10 billion USD that it wants to loan out.
Suppose that the bank loans out X USD.
We require that the portion of money not loaned out (10 billion - X) adequately covers the risk-weighted exposure (0.75 * X), i.e.
(10 billion - X) = 0.08 * 0.75 * X,
such that
X = (10 billion) / (1 + 0.08 * 0.75)