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FRM Part I · FRM Exam Part I · Stress Testing

A bank's CET1 ratio at the start of a stress test is 12.0% with RWA of $400 billion. Over the horizon, the minimum CET1 ratio reached is 8.5%, and the regulatory minimum plus buffer requirement is 7.0%. Which interpretation of the capital depletion is correct?

The bank passes the quantitative test because its minimum projected CET1 ratio of 8.5% stays above the 7.0% requirement. The 3.5 percentage point fall from 12.0% is not itself a failure criterion. Supervisors compare the trough ratio with required minimums.

  1. AThe bank fails the test because the ratio fell by more than 3 percentage points
  2. BThe bank fails because the minimum is below the starting ratio
  3. CThe bank passes the quantitative threshold because the minimum ratio of 8.5% exceeds the 7.0% requirement, with a 3.5 percentage point declineCorrect
  4. DThe bank passes only if it raises dividends during the horizon

Explanation

The decline is 12.0 - 8.5 = 3.5 percentage points. Supervisors compare the minimum projected ratio to the requirement, not the size of the decline. Since 8.5% exceeds 7.0%, the quantitative threshold is met.

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