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FRM Part II · FRM Exam Part II · Stress Testing Banks

In the US supervisory stress test, a bank starts with a CET1 ratio of 11.0%. Over the nine-quarter horizon, projected pre-provision net revenue is USD 0 net of other items, and the projected cumulative loss reduces CET1 capital by 3.5% of risk-weighted assets. Risk-weighted assets are assumed constant and no capital distributions occur. What is the minimum projected CET1 ratio, and is the bank above a 7.0% requirement?

The minimum projected CET1 ratio is 7.5%, which is 11.0% less the 3.5% capital reduction, with risk-weighted assets constant and no distributions. Because 7.5% exceeds the 7.0% requirement, the bank remains above it under the stress scenario.

  1. A7.5%, above the requirementCorrect
  2. B14.5%, above the requirement
  3. C3.5%, below the requirement
  4. D7.5%, below the requirement

Explanation

With RWA constant and no distributions, ending CET1 = 11.0% − 3.5% = 7.5%. This exceeds 7.0%, so the bank passes. Adding the loss (14.5%) is a sign error; 3.5% confuses the loss with the ending ratio.

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