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Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition by Youssef F. Bissada, Jean Dermine

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Current exposure method

Credit risk: replacement cost (‘marking to market’) + potential future credit exposure (add-on). The add-on is measured as follows:

Residual maturityInterest rateForex + GoldEquity
Less than one yearNil1%6%
One year to five years0.5%5%8%
Over five years1.5%7.5%10%
Exercise: Stage Six
Q1:Find below the balance sheet of a bank. Compute the Tier 1 capital ratio, the Tier 2 ratio, and the overall BIS capital ratio.
Assets Liabilities and shareholders’ equity
Reserves with central bank60Demand deposits750
Mortgage loans525Term deposits450
Corporate loans450Interbank deposits370
Interbank loans375Subordinated debt25
Government bonds ...

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