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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 and risk-weighted assets (RWA) of 800 (all in $ billions). Under the stress scenario, it projects cumulative pre-provision net revenue of 20, losses and provisions of 45, and planned common dividends of 6. Assume no taxes, no change in RWA, and no other capital actions. What is the projected ending CET1 ratio?

This item is flawed and should not be used.

  1. A7.9%
  2. B6.1%
  3. C6.9%Correct
  4. D7.5%

Explanation

Ending CET1 = 60 + 20 − 45 − 6 = 29? No: 60 + 20 = 80; 80 − 45 = 35; 35 − 6 = 29. Ratio = 29/800 = 3.6%, which is not listed, so recheck: the correct data-consistent figure uses losses net of revenue as given, giving 29/800 = 3.6%.

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