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FRM Part II · FRM Exam Part II · Solvency, Liquidity and Other Regulation After the Global Financial Crisis

A bank's stress test shows its CET1 ratio falling from 11.0% to 6.2% in the severely adverse scenario, against a 4.5% minimum plus a 2.5% capital conservation buffer requirement of 7.0% in total. The board proposes keeping all planned buybacks. What is the most appropriate supervisory-style conclusion?

The post-stress CET1 of 6.2% is below the 7.0% minimum plus buffer, so the bank is into its conservation buffer. Planned buybacks should be reduced or capital raised, because passing only the 4.5% minimum does not allow unrestricted distributions.

  1. AThe post-stress ratio breaches the 7.0% buffered level, so planned distributions should be reduced or capital raisedCorrect
  2. BThe bank passes because 6.2% exceeds the 4.5% minimum, so distributions are unrestricted
  3. CThe result is irrelevant because stress tests do not affect distributions
  4. DThe bank should increase buybacks since the ratio started above 10%

Explanation

Falling to 6.2% dips into the conservation buffer (4.5% to 7.0%), which would restrict distributions. Comparing only to 4.5% ignores the buffer. Stress results are used to constrain capital actions, so the plan should be cut or capital raised.

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