Skip to content

FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

A bank's internal-model RWAs are 90 and its standardised RWAs are 140. Its CET1 capital is 14. Applying a 72.5% output floor (no transition), what is the approximate CET1 ratio, compared with the ratio before the floor?

The CET1 ratio falls to about 13.8% from 15.6%. The floor is 72.5% of 140, or 101.5, which exceeds internal-model RWAs of 90. Dividing CET1 of 14 by 101.5 gives 13.8%, versus 14 divided by 90, or 15.6%, before the floor.

  1. AFloor gives 15.6% versus 13.8% before
  2. BFloor gives 13.8% versus 15.6% beforeCorrect
  3. CFloor gives 10.0% versus 15.6% before
  4. DFloor gives 15.6% with no change

Explanation

Floor = 0.725 x 140 = 101.5, which exceeds 90, so RWAs = 101.5. Ratio with floor = 14/101.5 = 13.8%; before floor = 14/90 = 15.6%. Option 3 uses the full 140 (10.0%), which wrongly applies a 100% floor.

Did you get it right without looking?

One question tells you little. A timed set on Basel III: Finalising Post-crisis Reforms shows your real accuracy, how long you take and where you lose marks.

Practise Basel III: Finalising Post-crisis ReformsFree diagnostic mock

More Basel III: Finalising Post-crisis Reforms questions