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FRM Part II · FRM Exam Part II · High-level Summary of Basel III Reforms

A bank's internal-model total RWA is 600 and its standardised total RWA is 1,000. Under the Basel III final reforms, the output floor is 72.5% when fully phased in, and in the first year of the transition it is 50%. Ignoring any transitional cap on the increase in RWA, what is the bank's RWA in the first year versus under the fully phased-in floor?

RWA is the higher of internal-model RWA and the floor percentage times standardised RWA. In year one the floor is 500, below 600, so RWA is 600. Fully phased in, the floor is 725, above 600, so RWA rises to 725.

  1. A600 in the first year and 725 fully phased inCorrect
  2. B500 in the first year and 725 fully phased in
  3. C600 in the first year and 600 fully phased in
  4. D725 in the first year and 600 fully phased in

Explanation

Floored RWA = max(internal-model RWA, floor% x standardised RWA). First year: max(600, 0.50 x 1,000 = 500) = 600. Fully phased in: max(600, 0.725 x 1,000 = 725) = 725. Option B wrongly uses the floor figure as RWA in year one rather than taking the maximum.

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