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

Under the supervisory approach to capital stress testing, a bank starts with a CET1 ratio of 11.0%. Projected stress-period losses and other items reduce CET1 capital by 3.0% of risk-weighted assets (RWA) over the planning horizon, and the bank's trough CET1 ratio is measured as the minimum over the horizon. If RWA are held constant, the trough CET1 ratio is 8.0% and the regulatory minimum plus buffer is 7.0%. What is the excess over the requirement and what does it imply?

The trough CET1 ratio is 11.0% minus 3.0%, or 8.0%. Against a 7.0% requirement that leaves a cushion of 1.0 percentage point, so the bank passes the quantitative test, though with a thin margin.

  1. A1.0 percentage point above the requirement, so the bank passes the quantitative testCorrect
  2. B4.0 percentage points above the requirement, so the bank passes with ample room
  3. C1.0 percentage point below the requirement, so the bank fails
  4. D3.0 percentage points above the requirement, because the starting ratio is irrelevant

Explanation

Trough ratio = 11.0% - 3.0% = 8.0%. Excess over the 7.0% requirement = 8.0% - 7.0% = 1.0 point, so the bank passes. Subtracting from the requirement instead of the trough ratio gives the wrong 4.0 and 3.0 figures.

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