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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

Under the finalised Basel III framework, a bank's total risk-weighted assets under internal models are RWA_internal = 80 billion. The aggregate output floor is 72.5% of RWAs computed under the standardised approaches, which total 120 billion. What RWAs must the bank use in its capital ratio (ignoring transitional arrangements)?

The bank must use 87 billion. The output floor is 72.5% of standardised RWAs of 120 billion, which equals 87 billion. Because internal-model RWAs of 80 billion are lower than that floor, the floor binds and sets the RWAs used in the capital ratio.

  1. A80 billion
  2. B87 billionCorrect
  3. C96 billion
  4. D120 billion

Explanation

Floor = 72.5% x 120 = 87 billion. Since internal-model RWAs of 80 billion are below the floor, the bank must use 87 billion. Using 80 ignores the floor; 96 applies 80% of standardised RWAs; 120 wrongly applies 100%.

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