FRM Part II · FRM Exam Part II · Capital Structure in Banks
Bank Alder has total assets of $200 billion, risk-weighted assets (RWA) of $100 billion, and Common Equity Tier 1 (CET1) capital of $9 billion. It has $3 billion of Additional Tier 1 and $4 billion of Tier 2 capital. What are its CET1 ratio and total capital ratio respectively?
The CET1 ratio is 9.0% and the total capital ratio is 16.0%. Both are measured against risk-weighted assets of $100 billion: CET1 is $9 billion, and total capital is $9 plus $3 plus $4, or $16 billion. Using total assets would wrongly halve the ratios.
- A4.5% and 8.0%
- B9.0% and 16.0%Correct
- C9.0% and 8.0%
- D4.5% and 16.0%
Explanation
Ratios use RWA as the denominator. CET1 ratio = 9/100 = 9.0%. Total capital = 9+3+4 = 16, so 16/100 = 16.0%. Using total assets of 200 as the denominator gives 4.5% and 8.0%, which is the wrong base.
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