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

Under the finalised Basel III reforms, a bank's total risk-weighted assets (RWA) are computed using its internal models and also using the standardised approaches. The output floor is set at 72.5% once fully phased in. The bank's modelled-approach RWA is 600 and the standardised-approach RWA is 1,000. What RWA must the bank use for its capital ratio?

The bank must use 725 of RWA. The output floor requires total RWA to be at least 72.5% of the standardised-approach RWA, which is 0.725 times 1,000. Because modelled RWA of 600 is lower, the floor binds and sets the RWA used in the capital ratio.

  1. A600
  2. B725Correct
  3. C1,000
  4. D1,072.5

Explanation

The floor requires RWA to be at least 72.5% of standardised RWA: 0.725 x 1,000 = 725. Since modelled RWA of 600 is below 725, the floor binds and 725 is used. Using 600 ignores the floor; 1,000 wrongly applies a 100% floor.

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