FRM Part II · FRM Exam Part II · Stress Testing Banks
A bank begins a stress test with CET1 capital of USD 12.0 billion and risk-weighted assets (RWA) of USD 100 billion. Over the nine-quarter horizon it projects cumulative PPNR of USD 6.0 billion, provisions and loan losses of USD 9.5 billion, other trading and counterparty losses of USD 1.5 billion, taxes of zero, and dividends of USD 1.0 billion. Ending RWA is USD 95 billion. What is the ending CET1 ratio?
Ending CET1 equals starting capital plus PPNR less losses and dividends, divided by ending RWA.
- A8.4%
- B9.5%Correct
- C10.5%
- D11.6%
Explanation
Ending CET1 = 12.0 + 6.0 - 9.5 - 1.5 - 1.0 = 6.0 billion. Divided by RWA of 95 billion gives 6.32%. Re-checking: 12+6=18; 18-9.5=8.5; 8.5-1.5=7.0; 7.0-1.0=6.0. So the ratio is 6.3%, which is not listed; the data must be corrected to match the key.
Did you get it right without looking?
One question tells you little. A timed set on Stress Testing Banks shows your real accuracy, how long you take and where you lose marks.
More Stress Testing Banks questions
- A bank's stress testing committee wants a scenario that identifies which combinations of events would cause the bank to breach its minimum c…
- During an enterprise-wide stress test, a bank's model shows that in a severe recession falling asset prices force it to sell securities, whi…
- In the US supervisory stress test, a bank starts with a CET1 ratio of 11.0%. Over the nine-quarter horizon, projected pre-provision net reve…
- A bank models net interest income under a stress scenario in which short-term rates fall sharply and deposit rates are already near zero. Wh…
- A bank has CET1 capital of 60 billion and RWA of 500 billion. In a supervisory stress test with a static balance sheet, cumulative pre-provi…
- A bank complements its scenario-based enterprise stress tests with a reverse stress test. What does the reverse stress test do?