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

A bank has CET1 of 40 billion and RWA of 400 billion (10.0%). Under a stress scenario, cumulative losses net of pre-provision revenue reduce CET1 by 12 billion, and RWA rises by 10% due to credit migration. The regulator's hurdle (minimum plus buffers) is 7.0%. What is the projected CET1 ratio and the excess or shortfall versus the hurdle in capital terms, measured against stressed RWA?

Stressed CET1 is 28 billion and stressed RWA is 440 billion, giving 6.36 percent. The 7 percent hurdle requires 30.8 billion, so the bank has a shortfall of about 2.8 billion. Ignoring RWA inflation would wrongly show exactly 7 percent.

  1. A6.36%; shortfall of about 2.8 billionCorrect
  2. B6.36%; shortfall of about 0.0 billion
  3. C7.00%; no shortfall
  4. D6.36%; excess of about 2.8 billion

Explanation

Stressed CET1 = 40 - 12 = 28. Stressed RWA = 440. Ratio = 28/440 = 6.36%. Required at 7% = 30.8, so shortfall = 2.8 billion. Ignoring RWA growth gives 7.0%, which wrongly shows no shortfall.

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