FRM Part I · FRM Exam Part I · Banks
A bank has total assets of $50 billion and Tier 1 capital of $2 billion. It takes a hit of $0.5 billion to equity and, to restore its leverage, plans to keep Tier 1 capital at the lower post-loss level while shrinking assets. What total assets give a Tier 1 leverage ratio of 4% after the loss?
Assets must be $37.5 billion. After the $0.5 billion loss, Tier 1 capital is $1.5 billion, and dividing by the 4% target leverage ratio gives $37.5 billion. Using pre-loss capital would incorrectly give $50 billion.
- A$37.5 billionCorrect
- B$12.5 billion
- C$50.0 billion
- D$30.0 billion
Explanation
Post-loss Tier 1 capital = 2.0 - 0.5 = $1.5 billion. Required assets = 1.5 / 0.04 = $37.5 billion. Using $0.5 billion gives $12.5 billion, which wrongly uses only the loss. Using 2.0/0.04 = $50 billion ignores the loss.
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