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FRM Part II · FRM Exam Part II · Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice

A bank has CET1 capital of USD 50 billion and RWA of USD 500 billion. Under stress, cumulative net losses after revenue are USD 15 billion, planned dividends are USD 5 billion, and RWA stay at USD 500 billion. The bank's internal minimum stress CET1 target is 7%. What is the ending CET1 ratio and does it meet the target?

Ending CET1 is 50 minus 15 minus 5, or 30 billion; divided by 500 billion RWA it is 6.0 percent. That is below the 7 percent target, so the bank fails. Omitting the dividends would wrongly show exactly 7 percent.

  1. A6.0%, below the targetCorrect
  2. B6.0%, meets the target
  3. C7.0%, meets the target
  4. D8.0%, meets the target

Explanation

Ending CET1 = 50 - 15 - 5 = 30 billion. Ratio = 30/500 = 6.0%, which is below the 7% target. Ignoring dividends gives 7.0%, the common error of leaving planned distributions out of the stress projection.

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