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?

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Quizplus · Accepted Answer

Concentration limit = Maximum loss as a percent of capital x (1 ÷ Loss rate)
Maximum loss as a percent of capital = Concentration limit x Recovery rate
Note: recovery rate = (1 - loss rate)
ML = 0.20 x 0.50 = 0.10.

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