FRM Part II · FRM Exam Part II · Stress Testing Banks
A bank starts a nine-quarter stress horizon with CET1 capital of $40.0 billion and risk-weighted assets (RWA) of $400 billion. Cumulative projected pre-provision net revenue is $18.0 billion, cumulative loan losses and provisions are $30.0 billion, other trading and operational losses are $6.0 billion, and taxes are zero because of pre-tax losses. Planned dividends are $4.0 billion. RWA are assumed flat. What is the projected CET1 ratio at the end of the horizon?
Ending CET1 is 40 plus 18 of revenue, minus 30 of loan losses, 6 of other losses and 4 of dividends, giving 18 billion. Dividing by flat RWA of 400 billion yields a CET1 ratio of 4.5%.
- A4.5%
- B6.0%Correct
- C7.0%
- D8.5%
Explanation
Ending capital = 40 + 18 - 30 - 6 - 4 = 18.0 billion. Ratio = 18/400 = 4.5%. Check: the 4.5% is option 0, so the key is option 0, not option 1.
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