The notes mentioned, Minimum capital under Basel II was defined as a percentage of total RWA (x%). The RWA include the risk weighted assets in respect of credit risk plus the cap req for market and operational risk multiplied by 12.5. Why is there a need to use “cap req for market and operational risk multiplied by 12.5”. Isn’t it the same if we say “The RWA include the risk weighted assets in respect of credit risk, market and operational risk” Unless we are considering situations where we calculate market and operational req cap using non factor approach. And to backsolve the corresponding RWA with respect to the calculated req cap, we take 1/8%. But how is this 8% related to the x% mentioned above?
If C is the Risk weighted assets then the capital required in respect of credit risk is C x 8% We also need capital of M and Op for market and operational risk respectively So Total capital is C x 8% + M + Op or ( C + M/8% + Op/8%) x 8% ie ( C + 12.5xM + 12.5xOp) x 8%
