FRM Part I · FRM Exam Part I · Stress Testing
A bank's stress test shows a minimum CET1 ratio of 7.0% with RWA of $400 billion at the trough. The regulatory minimum plus buffer requirement used for the test is 9.0%. The bank wants to restore the trough ratio to the requirement by cutting planned dividends, with RWA unchanged. By how much must CET1 capital be increased (through retained distributions) at the trough?
The shortfall is the gap of 2 percentage points between the 9% requirement and 7% trough ratio, applied to $400 billion of RWA. That equals $8 billion of additional CET1 needed, obtained by retaining that amount through lower dividends or buybacks.
- A$4 billion
- B$8 billionCorrect
- C$12 billion
- D$36 billion
Explanation
Required CET1 = 9% x 400 = 36 billion. Current trough CET1 = 7% x 400 = 28 billion. Shortfall = 8 billion. Check: 8/400 = 2 percentage points, equal to 9% - 7%.
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