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

A supervisor reviews the finalised Basel III output floor. A bank's total risk-weighted assets (RWA) calculated using its internal models are EUR 60 billion. The same exposures calculated using the standardised approaches would be EUR 100 billion. With the output floor fully phased in at 72.5%, what are the bank's RWA for capital purposes, and what is the main reason for the result?

The bank's RWA are EUR 72.5 billion. The output floor requires total RWA to be at least 72.5% of the standardised-approach figure, which is 0.725 times 100 billion. Because the internal-model result of 60 billion falls below this level, the floor binds and increases the capital base.

  1. AEUR 60 billion, since internal models are approved by the supervisor
  2. BEUR 72.5 billion, because the floor requires RWA to be at least 72.5% of the standardised totalCorrect
  3. CEUR 100 billion, because the floor requires full standardised RWA
  4. DEUR 43.5 billion, because the floor is applied to the internal-model RWA

Explanation

The floor sets RWA at no less than 72.5% of standardised RWA: 0.725 x 100 = 72.5bn. Since the internal-model figure of 60bn is lower, the floor binds and RWA is 72.5bn. Applying 72.5% to the model figure gives 43.5bn, which is the wrong base. The floor does not force full standardised RWA.

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