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FRM Part II · FRM Exam Part II · Capital Structure in Banks

A bank has CET1 of 700, Additional Tier 1 of 400, Tier 2 of 500, and risk-weighted assets of 10,000 (all USD millions). Use Basel III minimums: CET1 4.5%, Tier 1 6%, total capital 8%, plus a 2.5% capital conservation buffer on CET1. Assume no other buffers. The bank's CET1 ratio is 7.0%. Which statement is correct?

The bank meets all minimums and the full conservation buffer. CET1 of 700 on RWA of 10,000 is 7.0%, equal to the 4.5% minimum plus the 2.5% buffer, while Tier 1 is 11% and total capital 16%. No distribution restrictions apply.

  1. AThe bank meets all minimums and the full buffer, so there are no distribution restrictions
  2. BThe bank meets the CET1 minimum but is within the conservation buffer range, so it faces distribution restrictionsCorrect
  3. CThe bank breaches the Tier 1 minimum because AT1 is limited to 1% of RWA
  4. DThe bank breaches the total capital minimum because Tier 2 exceeds Tier 1

Explanation

The CET1 requirement including the buffer is 4.5% + 2.5% = 7.0%. The bank's CET1 is exactly 7.0%, so it is not inside the buffer; check: 700/10,000 = 7.0%. Tier 1 = 1,100 (11%), total = 1,600 (16%), all above minimums. The question therefore turns on being at, not below, the threshold.

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