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

Bank Cedar has RWA of USD 2,000 million. It holds CET1 of 130, Additional Tier 1 of 40, and Tier 2 of 60 (USD millions). Minimum ratios are CET1 4.5%, Tier 1 6%, total capital 8%, and it must also hold a 2.5% CET1 conservation buffer. Cedar's CET1 is used first to meet the minimum Tier 1 and total capital shortfalls only if AT1 and Tier 2 are insufficient. Ignoring other buffers, what is the CET1 ratio available for the conservation buffer after meeting all minimum requirements, expressed as a percentage of RWA?

The CET1 minimum of 4.5% requires 90 million, and AT1 and Tier 2 comfortably cover the Tier 1 and total capital minimums. Remaining CET1 of 130 less 90 equals 40 million, or 2.0% of RWA. This is below the 2.5% conservation buffer requirement.

  1. A2.00%Correct
  2. B2.50%
  3. C3.50%
  4. D4.50%

Explanation

Minimums in USD: CET1 90, Tier 1 120, total 160. AT1 of 40 covers Tier 1 gap only if CET1 is 80 or more; CET1 needed is max(90, 120-40=80)=90. Total: CET1 90 + AT1 40 + T2 60 = 190 ≥ 160, so no extra CET1 needed. Tier 1 is 170 vs 120, fine. Hence CET1 above the 4.5% minimum is 130-90 = 40, which is 2.0% of RWA, short of the 2.5% buffer.

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