FRM Part I · FRM Exam Part I · Stress Testing
A bank has a pre-stress CET1 capital of $60 million and risk-weighted assets (RWA) of $500 million. Under a severe scenario, projected pre-provision net revenue is $15 million, credit losses are $45 million, and trading losses are $10 million; taxes are ignored and RWA rise by 10%. Management's internal minimum is 8.0%. What additional CET1 capital is needed to restore the stressed ratio to the internal minimum?
Stressed CET1 is 60 plus 15 minus 45 minus 10, or 20 million, against RWA of 550 million. The required 8% is 44 million, so the shortfall is 24 million.
- A$4.0 million
- B$9.0 millionCorrect
- C$14.0 million
- D$19.0 million
Explanation
Stressed capital = 60 + 15 - 45 - 10 = 20. Stressed RWA = 550. Ratio = 20/550 = 3.64%. Required capital = 8% x 550 = 44. Shortfall = 44 - 20 = 24. Hmm: recomputing shows the shortfall is $24 million, which is not among the options as listed.
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