If a bank's concentration limit (as a percent of capital) is 20 percent, and its expected recovery from defaulted loans is 50 percent, what is the maximum loss it permits to affect its capital in the event of a default?

Question

Quizplus · Accepted Answer

The maximum loss permitted to affect the bank's capital in the event of a default is calculated by taking the concentration limit (20 percent) and adjusting it for the expected recovery rate (50 percent). This means the bank expects to recover 50 percent of the defaulted loans, so the maximum loss it permits is half of its concentration limit, which is 10 percent (20 percent * 50 percent = 10 percent).

If a Bank's Concentration Limit (As a Percent of Capital)