FRM Part II · FRM Exam Part II · Stress Testing Banks
A bank starts with CET1 capital of USD 10.0 billion. Over the stress horizon it projects PPNR of USD 4.0 billion, credit losses of USD 6.0 billion, trading losses of USD 1.0 billion and dividends of USD 0.5 billion, with no tax effects. Ending RWA is USD 80 billion. What is the ending CET1 ratio?
Ending CET1 is 10.0 + 4.0 - 6.0 - 1.0 - 0.5 = USD 6.5 billion. Divided by ending RWA of USD 80 billion, the CET1 ratio is about 8.13%. Capital is reduced by losses and dividends and increased by PPNR.
- A6.25%
- B7.50%Correct
- C8.13%
- D10.00%
Explanation
Ending CET1 = 10.0 + 4.0 - 6.0 - 1.0 - 0.5 = 6.5 billion. Dividing by 80 billion gives 8.125%, i.e. 8.13%. Check: 8.13% x 80 = 6.5. Omitting PPNR gives 2.5/80, and omitting dividends gives 7/80=8.75%.
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