FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms
A bank has modelled-approach RWA of 850 and standardised RWA of 1,000. Its Common Equity Tier 1 capital is 85. Under the fully phased-in 72.5% output floor, what is the bank's CET1 ratio, and is the floor binding?
The CET1 ratio is 10.0% and the floor is not binding. The floor level is 72.5% of 1,000, or 725, which is below the modelled RWA of 850, so 850 is used. Dividing CET1 of 85 by 850 gives 10.0%.
- A10.0%; floor not bindingCorrect
- B11.7%; floor binding
- C10.0%; floor binding
- D8.5%; floor not binding
Explanation
Floor RWA = 0.725 x 1,000 = 725. Modelled RWA of 850 exceeds 725, so the floor does not bind and RWA = 850. CET1 ratio = 85/850 = 10.0%. The 11.7% figure arises from dividing by the floor amount 725 mistakenly.
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