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

A bank's internally modelled total RWA is 600 and its RWA calculated under standardised approaches is 1,000. Assume the output floor is fully phased in at 72.5%, and ignore transitional arrangements and any other adjustments. What is the bank's RWA for capital ratio purposes, and what is the effect of the floor?

The floor equals 72.5% of 1,000, which is 725. Since the modelled RWA of 600 is below that level, the floor binds and the bank must use 725, which is 125 higher than its modelled figure. Ignoring the floor or treating it as 100% would be incorrect.

  1. A600, because the floor applies only when modelled RWA exceeds standardised RWA
  2. B625, because the floor is 62.5% of standardised RWA
  3. C1,000, because the floor requires equality with standardised RWA
  4. D725, because the floor binds and adds 125 of RWA relative to the modelled figureCorrect

Explanation

Floor = 72.5% x 1,000 = 725. Modelled RWA of 600 is below this, so the floor binds and RWA becomes 725, an increase of 125. Option A ignores the floor; option C treats the floor as 100%.

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