Explain the process of calculating risk-adjusted off-balance-sheet contingent guaranty contracts?
The first step is to convert the off-balance-sheet items to credit equivalent amounts of an on-balance-sheet item by multiplying the notional amounts by an appropriate conversion factor as given in Table 20-10. The converted amounts are then multiplied by the appropriate risk weights as if they were on-balance-sheet items.
a. What is the basis for differentiating the credit equivalent amounts of contingent guaranty contracts?
b. On what basis are the risk weights for the credit equivalent amounts differentiated?