medium · Corporate Credit Analysis cca-core
A bank analyst is calculating the Basel III IRB capital requirement for a corporate loan.
If the Expected Loss (EL) for the loan is 0.8% and the required regulatory capital (K) is 11.5%, which statement best explains the discrepancy?
- The K value includes the principal repayment while EL only covers interest at risk.
- The discrepancy reflects the difference between the physical PD and the risk-neutral PD.
- Regulatory capital includes a 10x multiplier on expected loss to account for operational risk.
- Capital is held against Unexpected Loss (UL), representing the 99.9% quantile stress scenario.
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