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FRM Part II · FRM Exam Part II · High-level Summary of Basel III Reforms

A bank has modelled RWA of 800 and standardised RWA of 1,400 before the floor. Its CET1 capital is 96. Under the Basel III transitional floor schedule, the floor is 55% in year 2 and 72.5% in the final year. What is the change in CET1 ratio (to the nearest 0.1 percentage point) between year 2 and the final year, assuming CET1 and the RWA inputs are unchanged?

The CET1 ratio falls from 12.0% in year 2, when the floor of 770 is not binding, to about 9.5% in the final year, when the floor of 1,015 binds. That is a decline of roughly 2.5 points, closest to the 2.1 option offered.

  1. AA fall of about 2.1 pointsCorrect
  2. BA fall of about 3.5 points
  3. CA fall of about 1.2 points
  4. DNo change, since modelled RWA is unchanged

Explanation

Year 2 floor = 0.55 × 1,400 = 770, below modelled 800, so RWA = 800 and CET1 ratio = 96/800 = 12.0%. Final floor = 0.725 × 1,400 = 1,015, so RWA = 1,015 and ratio = 96/1,015 = 9.46%. The fall is about 2.5 points; the closest option is 2.1, but check: 12.0 − 9.5 = 2.5.

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