medium · FRM Part 2 Liquidity & Treasury Risk
A bank has 100 bn of securities classified as 'Held-to-Maturity' (HTM).
If interest rates rise and the market value of these securities drops to85 bn, what is the immediate impact on the bank's regulatory Common Equity Tier 1 (CET1) capital?
- CET1 capital would immediately fall by roughly 15 bn to reflect this specific economic loss.
- CET1 rises because the bank's projected future interest income will be modestly higher under rates.
- There is zero immediate impact on regulatory CET1 because HTM securities are carried at amortized cost.
- The bank must reclassify these assets as 'Available-for-Sale' and take an immediate 15% capital haircut against RWA.
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