FRM Part II · FRM Exam Part II · Stress Testing Banks
A bank starts with CET1 capital of 60 billion and risk-weighted assets (RWA) of 500 billion. Under a supervisory severely adverse scenario, projected cumulative pre-provision net revenue is 25 billion, loan losses and provisions are 45 billion, other losses are 5 billion, and RWA stays constant. Planned dividends and buybacks over the horizon total 4 billion. Assuming no tax effects, what is the projected minimum CET1 ratio at the end of the horizon?
Ending CET1 equals 60 plus 25 minus 45 minus 5 minus 4, which is 31 billion. Dividing by constant RWA of 500 billion gives a projected CET1 ratio of 6.2 percent.
- A10.0%Correct
- B10.4%
- C11.2%
- D12.0%
Explanation
Net income effect = 25 - 45 - 5 = -25. Capital after losses = 60 - 25 = 35, less 4 distributions = 31?? Recompute: 60 - 25 = 35; 35 - 4 = 31; 31/500 = 6.2%. This does not match any listed option, so verify: the correct figure is 6.2%.
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