Answer Happy

(a) HSU Bank is a local bank with secured lending, commercial
& consumer loans and the commercial letter of credit as the
credit businesses, with internal risk weighting set as 30% and 100%
for the first two, respectively. For commercial letter of credit,
which is the off-balance-sheet item with secured lending as the
equivalent risk bucket, the conversion factor is 25%.
HSU Bank aims to maintain a Common Equity Tier 1 ratio of 8.5%.
Currently, the bank has $120m commercial & consumer loans,
$280m secured loan and $30m commercial letter of credit.
Determine the total risk adjusted assets value and the amount of
Common Equity Tier 1 capital required.
(b) Bank of Mongkok considers increasing a type of 2-year term
loans in the credit portfolio. The spread of one-year relevant
corporate bond over government bonds is 2.5% and the spread of
two-year relevant corporate bond over government bonds is 3%, and
the one-year and two-year interest rates of government bonds is 8%
and 9%, respectively. Identify the cumulative probability of
default. Show your answer as percentage rate with three decimal
places (Assume zero recovery in the event of default)