FRM Part II · FRM Exam Part II · High-level Summary of Basel III Reforms
A bank's standardised risk-weighted assets are 800. Its internal-model risk-weighted assets are 500. Under the Basel III output floor, which is set at 72.5% of standardised RWA, what RWA must the bank use for its capital ratio, assuming the floor is the only binding constraint?
The bank must use 580 of risk-weighted assets. The output floor equals 72.5% of standardised RWA, which is 0.725 times 800, or 580. Because the internal-model figure of 500 is lower than this floor, the floor binds and sets the RWA.
- A500
- B580Correct
- C800
- D1,100
Explanation
The floor is 72.5% x 800 = 580. Because the model RWA of 500 is below the floor, the bank must use 580. Using 500 ignores the floor, and 800 applies 100% of the standardised amount, which is not required.
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