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FRM Part II · FRM Exam Part II · Stress Testing Banks

A bank's stress test results show that a severe scenario would reduce CET1 capital by 3.0 percentage points from a starting ratio of 11.5%. The bank's internal minimum, including a management buffer, is 9.0%. Senior management suggests no action is needed because the regulatory minimum is 4.5%. What is the best assessment?

The post-stress CET1 ratio is 8.5% (11.5% less 3.0 points), which is below the 9.0% internal minimum even though it exceeds the 4.5% regulatory minimum. Management should consider capital or risk-reduction actions rather than comparing only to the regulatory floor.

  1. ANo action is needed because the post-stress ratio of 8.5% exceeds the regulatory minimum of 4.5%
  2. BThe post-stress ratio of 8.5% is below the internal minimum of 9.0%, so management should consider actions such as capital planning or risk reductionCorrect
  3. CThe post-stress ratio is 14.5%, so capital is ample
  4. DThe post-stress ratio is 8.5%, but internal minimums should be ignored in stress testing

Explanation

11.5% minus 3.0 points gives 8.5%. This is above the 4.5% regulatory minimum but below the 9.0% internal threshold, which includes the management buffer. Stress results should feed capital planning and risk appetite, so action should be considered.

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