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FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure

A bank has Tier 1 capital of USD 30 billion. Its on-balance sheet exposures are USD 800 billion, derivatives exposure is USD 120 billion and off-balance sheet items after credit conversion factors are USD 80 billion. It is a G-SIB subject to a leverage ratio buffer of 50% of its risk-based G-SIB surcharge of 1.5%. The minimum Basel III leverage ratio is 3%. Which statement is correct?

Total exposure is USD 1,000 billion, so the leverage ratio is 30/1,000 = 3.0%. A G-SIB must add a buffer of half its 1.5% surcharge, 0.75%, giving a 3.75% requirement. The bank falls short and is non-compliant despite meeting the 3% base minimum.

  1. ALeverage ratio is 3.0%, but the required minimum is 3.75%, so it is non-compliantCorrect
  2. BLeverage ratio is 3.0%, and it is compliant since the minimum is 3%
  3. CLeverage ratio is 3.75%, so it is compliant
  4. DLeverage ratio is 3.0%, but the required minimum is 4.5%, so it is non-compliant

Explanation

Exposure measure = 800 + 120 + 80 = 1,000 billion. Leverage ratio = 30/1,000 = 3.0%. G-SIB buffer = 0.5 x 1.5% = 0.75%, so the requirement is 3.75%. The bank is short. Ignoring the buffer wrongly gives compliance.

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