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FRM Part II · FRM Exam Part II · Solvency, Liquidity and Other Regulation After the Global Financial Crisis

A bank has risk-weighted assets of USD 500 billion. It must meet a 4.5% minimum CET1 requirement, a 2.5% capital conservation buffer and a 1.0% countercyclical buffer (all applied to RWA). Its CET1 capital is USD 42 billion. Assuming no other buffers, which describes its position?

The CET1 ratio is 42 divided by 500, or 8.4%, which exceeds the combined requirement of 8.0% (4.5% minimum plus 2.5% conservation buffer plus 1.0% countercyclical buffer). The bank is therefore outside the buffer range and faces no distribution restrictions.

  1. AIt meets the minimum but is within the buffer range and faces distribution restrictionsCorrect
  2. BIt is above the minimum plus all buffers and faces no restrictions
  3. CIt is below the 4.5% minimum and must be recapitalised immediately
  4. DIt meets the combined requirement because buffers apply only to Tier 1 capital, not CET1

Explanation

CET1 ratio = 42/500 = 8.4%. Minimum plus buffers = 4.5 + 2.5 + 1.0 = 8.0%, which is below 8.4%, so... the bank is above the combined requirement. Correct reading: it exceeds 8.0%, so no distribution restrictions apply.

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