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

A bank has Tier 1 capital of USD 36 billion. Its on-balance-sheet exposures (after permitted adjustments) are USD 900 billion, derivative exposures are USD 120 billion, securities financing transaction exposures are USD 80 billion, and off-balance-sheet items (after credit conversion factors) are USD 100 billion. The Basel III minimum leverage ratio is 3%. What is the bank's leverage ratio and the surplus Tier 1 capital over the minimum?

Total exposure is USD 1,100 billion, so the leverage ratio is 36 divided by 1,100, or 3.27%. The 3% minimum requires USD 33 billion of Tier 1 capital, leaving a surplus of USD 3 billion.

  1. A3.27%, surplus of USD 3.0 billionCorrect
  2. B3.60%, surplus of USD 9.0 billion
  3. C3.00%, surplus of USD 0
  4. D3.27%, surplus of USD 6.0 billion

Explanation

Total exposure = 900 + 120 + 80 + 100 = 1,100 billion. Leverage ratio = 36/1,100 = 3.27%. Minimum Tier 1 = 3% x 1,100 = 33 billion, so surplus = 3 billion. Using only on-balance-sheet exposures gives 4.0%, which is wrong because it omits derivative, SFT and off-balance-sheet exposures.

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