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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

A bank has internal-model-based total RWA of USD 600 billion. Its RWA computed under the standardised approaches for all risk categories is USD 900 billion. Applying the 72.5% output floor (ignoring transitional arrangements), what are the bank's floored RWA and the resulting effect?

The floor equals 72.5% of USD 900 billion, which is USD 652.5 billion. Because the model-based RWA of USD 600 billion is lower, the floor binds and RWA increases by USD 52.5 billion to USD 652.5 billion.

  1. AUSD 652.5 billion; RWA increases by USD 52.5 billionCorrect
  2. BUSD 600 billion; no change since model RWA is below standardised RWA
  3. CUSD 725 billion; RWA increases by USD 125 billion
  4. DUSD 540 billion; RWA decreases by USD 60 billion

Explanation

Floor = 0.725 × 900 = 652.5. Since 600 < 652.5, the floor binds and RWA rises by 52.5. Using 72.5% of 1,000 or ignoring the floor gives wrong figures, and 540 is 90% of 600, not relevant.

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