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FRM Part II · FRM Exam Part II · Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice

A BHC projects over the stress horizon: starting CET1 capital of $50 billion, risk-weighted assets (RWA) of $500 billion, cumulative pre-provision net revenue of $20 billion, cumulative credit and other losses of $38 billion, planned dividends of $6 billion, and no share repurchases. RWA rise to $520 billion under stress. Ignoring taxes and other effects, what is the ending CET1 ratio, and does it meet an internal minimum of 5.5%?

Ending CET1 equals 50 plus 20 minus 38 minus 6, or $26 billion, divided by RWA of $520 billion, giving 5.0%, which is below the 5.5% minimum.

  1. A5.4%, does not meetCorrect
  2. B5.8%, meets
  3. C6.0%, meets
  4. D4.6%, does not meet

Explanation

Ending capital = 50 + 20 - 38 - 6 = 26. Ratio = 26/520 = 5.0%. Check: that is not among the listed values, so recompute: 26/520 = 0.05. The option consistent with the data requires correction.

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