FRM Part I · FRM Exam Part I · Banks
A bank has Tier 1 capital of USD 45 million, total on-balance-sheet exposures of USD 900 million, and off-balance-sheet items with credit-converted exposure of USD 100 million. The Basel III minimum leverage ratio is 3%. By how much can the bank increase its total exposure before breaching the minimum, assuming Tier 1 capital is unchanged?
The bank can add USD 500 million of exposure. Current exposure is USD 1,000 million, a 4.5% leverage ratio. At a 3% minimum, Tier 1 of USD 45 million supports at most USD 1,500 million of exposure, so headroom is USD 500 million.
- AUSD 500 millionCorrect
- BUSD 400 million
- CUSD 600 million
- DUSD 1,500 million
Explanation
Current exposure = 900 + 100 = 1,000; leverage ratio = 45/1,000 = 4.5%. Maximum exposure at 3% = 45/0.03 = 1,500. Headroom = 1,500 − 1,000 = USD 500 million. The 1,500 option reports the maximum total rather than the increase.
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