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FRM Part II · FRM Exam Part II · Stress Testing Banks

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-provision net revenue is 25 billion, credit and market losses total 55 billion, and taxes and other effects are zero. Stress RWA rise by 10% because of rating migrations. The minimum CET1 requirement is 6.0%. What is the ending CET1 ratio and result?

Ending CET1 is 60 plus 25 less 55, or 30 billion. Stress RWA are 550 billion, giving a ratio of about 5.5%. That is below the 6.0% minimum, so the bank fails. Ignoring the rise in RWA would wrongly show exactly 6.0%.

  1. AApprox. 5.5%, below the 6.0% minimum, so the bank failsCorrect
  2. BApprox. 6.0%, exactly at the minimum, so the bank passes
  3. CApprox. 9.1%, comfortably above the minimum
  4. DApprox. 5.0%, because PPNR is ignored

Explanation

Ending CET1 = 60 + 25 - 55 = 30 billion. Stress RWA = 500 x 1.10 = 550 billion. Ratio = 30/550 = 5.45%, about 5.5%, below 6.0%. Using unchanged RWA gives 6.0%, and ignoring RWA growth is the key mistake.

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