FRM Part I · FRM Exam Part I · Stress Testing
A bank starts a stress test with CET1 capital of $60 billion and risk-weighted assets (RWA) of $500 billion. Over the nine-quarter horizon, projected cumulative pre-provision net revenue is $25 billion, projected loan losses and provisions are $45 billion, and other losses are $5 billion. Assume taxes are zero, no capital actions occur, and RWA stays constant. What is the projected minimum-end CET1 ratio?
Ending CET1 equals 60 plus 25 of revenue minus 45 of loan losses minus 5 of other losses, which is 35 billion. Dividing by constant RWA of 500 billion gives a CET1 ratio of 7.0%.
- A8.0%Correct
- B12.0%
- C7.0%
- D9.0%
Explanation
Ending CET1 = 60 + 25 - 45 - 5 = 35 billion. Ratio = 35/500 = 7.0%. Wait: the correct computation gives 7.0%, so the correct choice is the 7.0% option; 8.0% arises from omitting the $5 billion of other losses (40/500), and 12.0% ignores all stress effects.
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