FRM Part II · FRM Exam Part II · High-level Summary of Basel III Reforms
A bank has Tier 1 capital of 24 billion and a total exposure measure of 600 billion. The minimum Basel III leverage ratio is 3%. Management wants to know how much the exposure measure could increase, holding Tier 1 capital constant, before the minimum is breached. What is the answer?
The exposure measure can rise by 200 billion. At the 3% minimum, 24 billion of Tier 1 capital supports at most 800 billion of exposure, and the bank currently has 600 billion, leaving 200 billion of headroom before the minimum leverage ratio is breached.
- A100 billion
- B200 billionCorrect
- C24 billion
- D800 billion
Explanation
Current ratio is 24/600 = 4%. Maximum exposure at 3% is 24/0.03 = 800 billion. Headroom is 800 - 600 = 200 billion. The 800 billion option confuses maximum exposure with headroom.
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