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FRM Part II · FRM Exam Part II · High-level Summary of Basel III Reforms

A bank has CET1 capital of 90 and standardised RWA of 1,000, with internal-model RWA of 600. Under the 72.5% output floor, which is the bank's CET1 ratio, and how does it compare with the ratio before applying the floor?

With the floor, RWA is 72.5% of 1,000, or 725, which exceeds the model figure of 600. The CET1 ratio becomes 90/725, about 12.4%, compared with 90/600, or 15.0%, before the floor. The floor reduces the ratio.

  1. A12.4% with the floor, versus 15.0% before the floorCorrect
  2. B15.0% with the floor, versus 12.4% before the floor
  3. C9.0% with the floor, versus 15.0% before the floor
  4. D12.4% with the floor, versus 9.0% before the floor

Explanation

Floor RWA = 0.725 x 1,000 = 725, which exceeds 600 and binds. CET1 ratio with the floor = 90/725 = 12.41%. Before the floor = 90/600 = 15.0%. The floor therefore reduces the ratio by about 2.6 percentage points. Using 1,000 as the base gives 9.0%, which wrongly applies a 100% floor.

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