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FRM Part II · FRM Exam Part II · Stress Testing Banks

A bank starts a stress horizon with CET1 capital of 12,000 and risk-weighted assets (RWA) of 100,000, so a CET1 ratio of 12%. Under the integrated adverse scenario, the bank projects: pre-provision net revenue of 2,500, credit losses of 4,000, trading losses of 1,500, and operational losses of 500, all pre-tax with no tax effects and no dividends. RWA rise by 10,000 because of rating migration. What is the projected CET1 ratio at the end of the horizon?

The projected CET1 ratio is 7.7 percent, calculated as ending CET1 of 8,500 divided by ending RWA of 110,000. CET1 falls by net losses of 3,500, and RWA grows by 10,000. None of the options matches.

  1. A8.2%
  2. B9.1%Correct
  3. C9.5%
  4. D10.0%

Explanation

Net loss = 2,500 - 4,000 - 1,500 - 500 = -3,500. Ending CET1 = 12,000 - 3,500 = 8,500. Ending RWA = 110,000. Ratio = 8,500/110,000 = 7.7%. Rechecking options: none equals 7.7%, so recompute intended data: this result must be used.

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