FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms
A bank's internally modelled RWA is 600 and its standardised-approach RWA is 1,000. Under the Basel III output floor at the fully phased-in level of 72.5%, what RWA is used as the denominator for the bank's capital ratio, assuming the floor is the binding constraint and other factors are ignored?
The denominator is 725. The output floor requires total RWA to be at least 72.5% of standardised RWA, which is 0.725 x 1,000 = 725. Because the modelled figure of 600 is lower, the floor binds and 725 is used.
- A600
- B725Correct
- C1,000
- D1,325
Explanation
The floor equals 72.5% x 1,000 = 725. Since the modelled RWA of 600 is below 725, total RWA is the greater of the two, 725. Using 600 ignores the floor; 1,000 wrongly applies 100% of standardised RWA.
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