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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

A bank's total risk-weighted assets under its internal models are 600 (in USD million), while the standardised approaches applied to the same exposures would give 1,000. Under the Basel III output floor fully phased in at 72.5%, what are the bank's RWAs for capital purposes, and what is the effect?

RWAs are 725 million, since the floor is 72.5% of the 1,000 standardised figure. The internal-model figure of 600 is below this, so the floor binds and increases RWAs by 125 million. It does not require the full 1,000 of standardised RWAs.

  1. A600; the floor is not binding because internal RWAs are below standardised RWAs
  2. B725; the floor is binding and adds 125 to RWAsCorrect
  3. C725; the floor is binding and adds 25 to RWAs
  4. D1,000; the floor requires full standardised RWAs

Explanation

Floor = 72.5% x 1,000 = 725. Since internal RWAs of 600 are below 725, the floor binds and RWAs become 725, an increase of 725 - 600 = 125. Using 600 ignores the floor; using 1,000 applies a 100% floor; adding 25 confuses the shortfall with 725 - 700.

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