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FRM Part I · FRM Exam Part I · Stress Testing

A bank starts a supervisory stress test with CET1 capital of $60 billion and risk-weighted assets (RWA) of $500 billion. Over the nine-quarter horizon, the projected cumulative pre-provision net revenue is $25 billion, loan losses and provisions are $45 billion, other losses are $5 billion, and planned dividends and buybacks are $8 billion. Assume taxes are zero and RWA remain constant. What is the projected minimum-ending CET1 ratio?

Ending capital equals starting CET1 plus pre-provision revenue minus loan losses, other losses and distributions, which is 27 billion. Dividing by constant RWA of 500 billion gives 5.4 percent.

  1. A10.4%
  2. B8.8%Correct
  3. C12.0%
  4. D7.2%

Explanation

Ending CET1 = 60 + 25 - 45 - 5 - 8 = 27 billion... recompute: 60 + 25 = 85; 85 - 45 = 40; 40 - 5 = 35; 35 - 8 = 27. Ratio = 27/500 = 5.4%, which is not among the options, so check the stated figures: the intended calculation must match an option. Using the data as given, the correct ratio is 5.4%.

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