FRM Part II · FRM Exam Part II · Stress Testing Banks
A bank starts a stress test with a CET1 ratio of 12.0% on risk-weighted assets (RWA) of USD 500 billion. Over the horizon, the scenario produces cumulative credit losses of USD 20 billion, market losses of USD 8 billion, and pre-provision net revenue of USD 10 billion, with no taxes, dividends or other effects. Stressed RWA rises to USD 560 billion. What is the ending CET1 ratio?
The ending CET1 ratio is 7.50%. Starting capital is USD 60 billion; net loss after revenue is 28 minus 10, or USD 18 billion, leaving USD 42 billion. Dividing by stressed RWA of USD 560 billion gives 7.5%.
- A8.57%Correct
- B7.50%
- C9.64%
- D10.00%
Explanation
Starting CET1 = 0.12 x 500 = 60. Net loss = 20 + 8 - 10 = 18, so ending CET1 = 42. Ratio = 42/560 = 7.5%. Check: 42/560 = 0.075. So the correct value is 7.50%, not 8.57%.
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