Before It Breaks
How Far From Here Does It Break?
Not whether a bank is solvent today. Supervision is about the distance between today and the day it is not.
12 min140 XP available4 challenges
The bank holds 100 of assets. Risk-weighted assets are the density times that, and its capital ratio is measured against them. A loss falls on assets — so it hits the ratio divided by the density. The CET1 minimum is 4.5%. Risk weights are held fixed here, which flatters every number on this panel: in a real downturn exposures are downgraded, the denominator rises while the numerator falls, and the bank breaks sooner than this shows.
CET1 after the scenario
8.29%
ratio − loss ÷ density
- Distance to the 4.5% minimum
- 3.79%
- Loss rate that breaks it
- 3.33%
below zero is a resolution question
(ratio − 4.5%) × density
Large European banks report around 14-15%
RWA over total assets — mortgage lenders sit low, corporate lenders high
Adverse scenarios are usually a few per cent of the book
Compare the breaking point at 30% density and at 100%, then push this bank below the minimum
- Try 30% — not yet
- Try 100% — not yet
- Compare the breaking point at 30% density and at 100%, then push this bank below the minimum — not yet
Answer to continue.