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

Bank Birch has RWA of $50 billion. Its capital stack: CET1 $3.0 billion, AT1 $1.0 billion, Tier 2 $2.5 billion. Assume minimum requirements of CET1 4.5%, Tier 1 6%, total capital 8%, plus a 2.5% capital conservation buffer to be met with CET1. Which statement is correct?

Bank Birch has a CET1 ratio of 6.0%, below the 7.0% needed once the 2.5% conservation buffer is added, so it faces buffer restrictions. Its Tier 1 ratio of 8% and total ratio of 13% are adequate, but the buffer must be met with CET1.

  1. AIt meets the CET1 minimum plus buffer (7.0%) but fails the total capital requirement incl. buffer
  2. BIt fails the CET1 minimum plus buffer, as CET1 is 6.0% versus 7.0% required, though it meets the minimum total capitalCorrect
  3. CIt meets all requirements including the buffer because total capital is 13%
  4. DIt fails the Tier 1 minimum because Tier 1 is 5.5% of RWA

Explanation

CET1 = 3/50 = 6.0%; Tier 1 = 4/50 = 8.0%; total = 6.5/50 = 13.0%. Required CET1 with buffer is 7.0%, so it falls short, though it exceeds the 4.5% minimum. Tier 1 of 8% exceeds 6%, and total 13% exceeds the 8% minimum and the 10.5% with buffer. The buffer must be CET1, so strong total capital does not compensate.

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