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FRM Part II · FRM Exam Part II · Capital Structure in Banks

Bank Alder reports the following (USD millions): common shares and retained earnings 70; goodwill 8; deferred tax assets from temporary differences within allowable limits 0; deferred tax assets from net operating loss carryforwards 4; Additional Tier 1 instruments 15. Assume the only CET1 deductions are goodwill and the net operating loss DTAs, and that risk-weighted assets are USD 1,000 million. What is Alder's CET1 ratio?

CET1 equals common equity of 70 less goodwill of 8 and loss carryforward DTAs of 4, giving 58 million. Dividing by risk-weighted assets of 1,000 million gives 5.8%. Additional Tier 1 instruments are excluded from CET1.

  1. A5.8%
  2. B6.2%Correct
  3. C7.0%
  4. D7.8%

Explanation

CET1 = 70 - 8 - 4 = 58. Ratio = 58 / 1,000 = 5.8%. Check: 70 - 12 = 58. Wait, recompute: 58/1000 = 5.8%, so the key is the first option.

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