FRM Part I · FRM Exam Part I · Banks
A bank has Tier 1 capital of $45 million and total leverage exposure of $1,500 million. Its RWA is $600 million. The regulator requires a minimum leverage ratio of 4% and a minimum Tier 1 risk-based ratio of 8%. Which statement is correct?
The leverage ratio is 45/1,500, or 3.0%, below the 4% minimum. The Tier 1 risk-based ratio is 45/600, or 7.5%, below the 8% minimum. The bank therefore fails both requirements.
- AIt meets both requirements
- BIt fails the leverage ratio but meets the risk-based ratioCorrect
- CIt meets the leverage ratio but fails the risk-based ratio
- DIt fails both requirements
Explanation
Leverage ratio = 45/1,500 = 3.0%, below 4%. Risk-based Tier 1 ratio = 45/600 = 7.5%, which is below 8%, so it fails both. Check: required Tier 1 under leverage = 60 and under risk-based = 48; capital of 45 is short of both.
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