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FRM Part II · FRM Exam Part II · Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice

A bank holding company starts the planning horizon with common equity tier 1 (CET1) capital of $60 billion and risk-weighted assets (RWA) of $500 billion. Under the stress scenario, projected cumulative pre-provision net revenue is $25 billion, loan losses and other losses are $40 billion, and planned dividends and buybacks total $5 billion. RWA stay unchanged and taxes and other items are ignored. If the minimum required CET1 ratio is 7%, what is the minimum CET1 ratio reached and does it meet the requirement?

Ending CET1 capital is 60 plus 25 minus 40 minus 5, or $40 billion. Dividing by RWA of $500 billion gives 8.0%, which exceeds the 7% minimum, so the bank meets the requirement under the stress scenario.

  1. A8.0%, which meets the requirementCorrect
  2. B10.0%, which meets the requirement
  3. C8.0%, which fails the requirement
  4. D9.0%, which fails the requirement

Explanation

Ending CET1 = 60 + 25 - 40 - 5 = 40 billion. Ratio = 40/500 = 8.0%, above 7%, so it passes. Ignoring distributions gives 45/500 = 9.0%; ignoring PPNR gives 15/500 on a different base, both wrong.

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