Which activity would require the largest capital charge under the 1988 Basel Accord: a loan to another bank or a loan to a large MNC? Would this necessarily be true under the Basel II rules?
What will be an ideal response?
Under Basel I, claims on other banks received only a 20% weighting, meaning that only 20% of the claim would be counted against the 8% capital requirement. Some claims received a 50% weighting, but virtually all claims on the non-bank private sector received a 100% weight and hence the full capital charge. Hence, the charge for the loan to the MNC would be larger. Under Basel II, other risks are taken into account (market risk and operational risk), and credit risk is measured differently, primarily to better reflect the true creditworthiness of the borrower. Consequently, it is conceivable that the capital charge for the bank loan is larger than for the MNC under Basel II.
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