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Question 981  margin loan, Basel accord, credit conversion factor

Margin loans secured by listed stock have a Basel III risk weight of 20%.

For margin loans that cannot be immediately cancelled by banks and asked to be repaid, the credit conversion factor (CCF) is 20%.

Suppose you have a stock portfolio worth $500,000, financed by:

  • $300,000 of your own money; and
  • $200,000 of the bank’s funds in the form of a margin loan which can only be cancelled by the bank after 5 days notice. The margin loan’s maximum LVR is 70%.

How much regulatory capital must the bank hold due to your margin loan? Assume that the bank wishes to pay dividends to its shareholders, so include the 2.5% capital conservation buffer in your calculations.

Copyright © 2014 Keith Woodward