Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans.The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments.For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected. What is the concentration limit (as a percent of capital) for unsecured loans made by Kansas Bank?

Question

Quizplus · Accepted Answer

For unsecured loans, since the bank assumes no recovery of interest or principal upon default, the entire amount of the loan is at risk. Therefore, to ensure that the maximum loss does not exceed 20 percent of capital, the concentration limit for unsecured loans is directly set at 20 percent of capital.

Kansas Bank Has a Policy of Limiting Their Loans to Any