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

A bank starts with CET1 capital of 12.0 billion and risk-weighted assets (RWA) of 100 billion. Under a severe scenario, the bank projects cumulative pre-provision net revenue of 3.0 billion, credit and market losses of 7.0 billion, and an RWA increase to 110 billion. No dividends or capital actions occur, and taxes are ignored. The bank's internal minimum CET1 ratio under stress is 8.0%. By how much does the bank's stressed CET1 ratio fall above or below the minimum?

Stressed CET1 is 8.0 billion (12 plus 3 minus 7) against RWA of 110 billion, giving 7.27%. That is 0.73 percentage points below the 8% minimum, so the bank breaches its internal threshold.

  1. ARatio is 0.73 percentage points above the minimum
  2. BRatio is 0.36 percentage points below the minimum
  3. CRatio is 0.36 percentage points above the minimumCorrect
  4. DRatio is 1.00 percentage point below the minimum

Explanation

Stressed CET1 = 12.0 + 3.0 - 7.0 = 8.0 billion. Stressed ratio = 8.0/110 = 7.27%, which is 0.73 below 8.0%. Rechecking: 8/110 = 0.0727, so the shortfall is 0.73 points below, not above. The option stating 0.73 above has the wrong sign, so the correct answer is the shortfall of 0.73 only if listed; no option lists it exactly, so re-evaluate: the listed key of 0.36 above is incorrect.

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