Lab Test · Module 4.1

The Basel framework

50 min8 problems34 answers

How it works

Eight problems from the people who keep a bank's capital in order: regulatory reporting, capital, treasury, finance, balance sheet management, resolution planning and capital planning. They follow one new bank, Wrenfold Bank plc, and build its capital ratio from the accounts up; later problems reuse earlier answers, restated in each scenario. Answer each part (the unit is shown beside the box; £, %, commas, a minus sign and an x after a multiple are fine), press Check, then step through the worked solution. Numeric answers are marked right within a small tolerance, so round sensibly as you go; the floor factor must be exact. Keep a calculator handy.

Illustrative dataWrenfold Bank plc, a new bank for the Lab Test

The lessons use RiskAtoms Bank plc's capital book. These problems apply the same rules to a new, smaller UK retail bank: Wrenfold Bank plc, invented, with £48,000m of assets at 31 December 2025. Its accounts, RWA, capital instruments, leverage items and debt are all made up and kept hand-sized; amounts in £ millions. Like the module's book it applies Basel 3.1 pro forma: on that date UK banks still reported under the old UK CRR, and the UK applies Basel 3.1 from 1 January 2027 (PRA PS1/26). Pillar 2A is illustrative and the UK countercyclical buffer is the 2% in force at 31 December 2025.

Problem 1From equity to CET1

L4.1.02

Regulatory reporting, Wrenfold Bank plc

Wrenfold Bank plc (invented) is a UK retail bank with £48,000m of assets, mostly mortgages. Its accounting equity at 31 December 2025 is £2,655m: ordinary shares and premium £800m, retained earnings £1,640m, an FVOCI reserve of −£30m (unrealised losses on bonds), a cash flow hedge reserve of +£45m, and £200m of AT1 that IAS 32 classes as equity.

On the asset side: goodwill £120m, capitalised software £80m, deferred tax assets from tax losses £40m and from temporary differences £80m, and a 30% stake in an unconsolidated insurer's ordinary shares, held at £260m. Prudent valuation adjustments are 0.1% of £10,000m of fair-valued assets. The IRB provisions exceed expected loss, so there is no shortfall, and the bank holds no other financials' shares.

Lessons: L4.1.02: Common Equity Tier 1

  1. (a)What is CET1 after the deductions and filters applied in full, before the threshold items? Answer in £m.

    £m

  2. (b)How much of the insurer stake is deducted from CET1? Answer in £m.

    £m

  3. (c)What is the bank's CET1? Answer in £m.

    £m

  4. (d)The threshold items not deducted are risk weighted instead. How much RWA do they add? Answer in £m.

    £m

Problem 2RWA and the output floor

L4.1.04

Capital analyst

Wrenfold's RWA at 31 December 2025, applying Basel 3.1 pro forma as RiskAtoms Bank plc's book does, in £ millions:

ItemAs usedStandardised
Mortgages, retail IRB (RWA)6,00012,200
Other credit portfolios, SA (RWA, incl. Problem 1's threshold items)7,7407,740
Counterparty credit, SA-CCR (RWA)6060
CVA capital, reduced BA-CVA66
Market risk capital, FRTB SA2424
Operational risk capital (BIC, ILM = 1)130130

The mortgages are £30,000m of exposure. The output floor is the fully phased-in 72.5% of RWA computed with the standardised approaches.

Lessons: L4.1.04: Risk-weighted assets

  1. (a)What RWA do the CVA, market and operational risk charges add together? Answer in £m.

    £m

  2. (b)The mortgages' standardised RWA are how many times their IRB RWA?

    ×

  3. (c)By how much does the output floor raise total RWA? Answer in £m (0 if it does not bind).

    £m

  4. (d)Above what floor factor does the floor bind on this balance sheet? Answer in %.

    %

  5. (e)What is the RWA density (RWA after the floor ÷ total assets)? Answer in %.

    %

Problem 3Tier 2 and the three ratios

L4.1.01 · L4.1.03

Capital analyst

Wrenfold's CET1 is £2,116m (Problem 1), its AT1 £200m, and its RWA after the floor £15,950m (Problem 2). Its Tier 2 is £300m of subordinated notes maturing on 31 December 2031, plus any excess of IRB provisions over expected loss: provisions on the IRB mortgages are £90m against an expected loss of £50m, on £6,000m of IRB credit RWA.

The PRA has set Pillar 2A at 3% of RWA (illustrative), to be met at least 56.25% in CET1 and 75% in Tier 1, as Pillar 1 is.

Lessons: L4.1.01: Capital ratios and the capital stack · L4.1.03: Additional Tier 1 and Tier 2

  1. (a)How much of the excess provisions counts in Tier 2? Answer in £m.

    £m

  2. (b)What is the CET1 ratio? Answer in %.

    %

  3. (c)What is the Tier 1 ratio? Answer in %.

    %

  4. (d)What is the total capital ratio? Answer in %.

    %

  5. (e)What CET1 ratio do Pillar 1 and Pillar 2A require together? Answer in %.

    %

  6. (f)Which ratio has the least room above its Pillar 1 + Pillar 2A requirement?

Problem 4The AT1 trigger and the Tier 2 clock

L4.1.03

Treasury, capital issuance

Wrenfold's £200m AT1 is perpetual and is written down permanently and in full if CET1 falls below 7% of RWA. Start from Problem 3: CET1 £2,116m, RWA £15,950m, held fixed throughout. The £300m Tier 2 notes mature on 31 December 2031.

Lessons: L4.1.03: Additional Tier 1 and Tier 2

  1. (a)How large a loss of CET1 takes the bank exactly to the trigger? Answer in £m.

    £m

  2. (b)A run of bad years takes £1,050m out of CET1. What is the CET1 ratio once the AT1 has been written down? Answer in %.

    %

  3. (c)What does the write-down do to the Tier 1 ratio?

  4. (d)Back in normal times: how much of the notes will count in Tier 2 on 30 June 2028? Answer in £m.

    £m

Problem 5Buffers and payouts

L4.1.05

Finance director

Wrenfold has CET1 £2,116m, AT1 £200m and Tier 2 £336m on RWA of £15,950m, with the Pillar 1 and Pillar 2A requirement of Problem 3. Its combined buffer is the 2.5% conservation buffer plus the UK countercyclical buffer of 2% (the rate in force at 31 December 2025, FPC Record, December 2025); its O-SII buffer is 0%, because its UK leverage exposure is far below the lowest bucket (£190bn from 1 January 2026). No G-SIB or systemic risk buffer applies.

The UK maximum distributable amount pays out 0, 0.2, 0.4 or 0.6 of profits by quartile of the combined buffer, lowest first.

Lessons: L4.1.05: Capital buffers

  1. (a)At what CET1 ratio do restrictions on payouts start? Answer in %.

    %

  2. (b)The bank loses £600m of CET1 after tax; RWA do not change. What is its MDA headroom now? Answer in £m (negative if below the line).

    £m

  3. (c)Where in the combined buffer does its CET1 sit after the loss?

  4. (d)Profits after tax for the next four quarters are £250m. What is the maximum distributable amount? Answer in £m.

    £m

Problem 6The leverage backstop

L4.1.06

Balance sheet management

Wrenfold's £48,000m of assets include £100m of derivative assets, £1,500m of reverse repos, and the goodwill, software and loss DTAs of Problem 1, as well as the stake. The derivatives have a replacement cost of £60m and a potential future exposure of £40m under SA-CCR. Against the reverse repos the bank holds gilts now worth £1,470m. Off balance sheet: £2,500m of committed undrawn facilities and £2,000m of unconditionally cancellable card and overdraft limits.

Tier 1 is £2,316m and RWA £15,950m. The bank is not in scope of the UK leverage ratio (its retail deposits are well below £75bn and its non-UK assets below £10bn), so use Basel's 3%.

Lessons: L4.1.06: The leverage ratio

  1. (a)What is the derivatives' leverage exposure? Answer in £m.

    £m

  2. (b)What is the total leverage exposure measure? Answer in £m.

    £m

  3. (c)What is the leverage ratio? Answer in %.

    %

  4. (d)How much Tier 1 does the binding rule ask for: 3% of the exposure, or the risk-based Tier 1 requirement with Pillar 2A and the combined buffer? Answer in £m.

    £m

Problem 7Loss absorbency in resolution

L4.1.07

Resolution planning

With £48,000m of assets, above the Bank of England's indicative £25bn to £40bn range, and far more than 80,000 transactional accounts, Wrenfold's preferred resolution strategy is bail-in. It is not subject to a leverage requirement. Own funds are £2,652m, RWA £15,950m, Pillar 2A 3%, and the combined buffer 4.5%.

Its other liabilities include £2,200m of senior unsecured bonds, of which £400m fall due within a year, £2,000m of covered bonds, and its deposits. Take the senior bonds to meet the subordination expectation, as the module's book does.

Lessons: L4.1.07: TLAC and MREL

  1. (a)What is the bank's MREL requirement? Answer in £m.

    £m

  2. (b)What are its MREL resources? Answer in £m.

    £m

  3. (c)If Wrenfold were a G-SIB, what would the FSB's TLAC minimum be? Use the leverage exposure of Problem 6 (£48,986m). Answer in £m.

    £m

  4. (d)Which TLAC leg binds, and why?

Problem 8The floor phases in

L4.1.08 · L4.1.04

Capital planning

Problem 2 used the fully phased-in 72.5% floor. In the UK the output floor starts on 1 January 2027 and phases in by year. Hold Wrenfold's 31 December 2025 balance sheet and its Basel 3.1 figures fixed: RWA as used £15,800m, standardised £22,000m, CET1 £2,116m.

Lessons: L4.1.08: Basel 3.1 from 2027: UK, EU and US · L4.1.04: Risk-weighted assets

  1. (a)What floor factor applies in the UK in 2029? Answer in %.

    %

  2. (b)What are the bank's total RWA in 2029? Answer in £m.

    £m

  3. (c)In which year does the floor first bind on this balance sheet?

Score 0 / 340 of 8 problems checked

Back · L4.1.08

Basel 3.1 from 2027: UK, EU and US

Next module · L4.2.01 · coming soon

The standardised approach: corporates, banks and sovereigns