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Ciskei Commercial Bank has a credit portfolio of R7.5 bn, with an average portfolio default...

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Finance

Ciskei Commercial Bank has a credit portfolio of R7.5 bn, with an average portfolio default probability (PD) of 1.2%. The net income or margin is 2.7%. If the portfolio collapses, about 45% of recovery can happen. Therefore, the maximum loss would be R4.125 bn (55% x 7.5 bn). Hence, the outcome shows a gain of roughly R202.5 m versus a loss of R4.125 bn. Ciskei Commercial Bank maintains a 10% capital adequacy ratio and the portfolio exposure (RWA) is R7.5 bn. Based on the Kelly Criterion, how much capital buffer should Ciskei Commercial Bank maintain?

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