FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms
A bank's internal-model-based total RWA is 600 and its RWA under the standardised approaches is 1,000. The output floor is fully phased in at 72.5%. Ignoring any transitional cap or provisions adjustments, what RWA does the bank use for its capital ratio requirements?
The bank uses RWA of 725. The floor equals 72.5% of the 1,000 standardised RWA, which is higher than the 600 from internal models, so the floor binds and sets the RWA used in capital ratios.
- A600
- B725Correct
- C1,000
- D1,325
Explanation
Floor = 72.5% x 1,000 = 725. Because 600 is below 725, the floor binds and total RWA is 725. Using 1,000 wrongly applies the standardised RWA in full, and 600 ignores the floor. 1,325 wrongly adds the amounts.
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