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

A G-SIB reports Tier 1 capital of USD 90 billion. Its total exposure measure is USD 2,400 billion, of which USD 200 billion is central bank reserves. Assume the bank's leverage ratio minimum is 3% plus a buffer equal to 50% of its G-SIB risk-based surcharge of 2.0%, and that no exclusion of central bank reserves applies unless stated by the regulator (none is stated). Which is correct?

The bank falls short. Its leverage ratio is 90/2,400 = 3.75% against a requirement of 3% plus half of the 2.0% surcharge, or 4.0%. It would need Tier 1 of USD 96 billion, so the shortfall is USD 6 billion.

  1. AThe ratio is 3.75%, below the 4.0% requirement, a shortfall of USD 6 billionCorrect
  2. BThe ratio is 3.75%, above the 4.0% requirement
  3. CThe ratio is 4.1%, meeting the 4.0% requirement
  4. DThe ratio is 3.75%, below the 4.0% requirement, a shortfall of USD 6 billion, because reserves are excluded

Explanation

Requirement = 3% + 0.5×2.0% = 4.0%. Ratio = 90/2,400 = 3.75%. Required Tier 1 = 0.04×2,400 = 96, so shortfall is 6 billion. Excluding reserves would give 90/2,200 = 4.09%, but no exclusion is stated. The last option wrongly cites exclusion.

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