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IBBC CAPITAL ACADEMY / 2027

Analyze a bank through capital and asset quality

Independent IBBC Capital draft content for self-study. Not affiliated with or endorsed by CFA Institute. New lessons await subject-matter review. No CFA designation or official PSM credit is awarded.

Learning goals

  • Calculate the CET1/RWA ratio.
  • Explain why 4% applies to this case.
  • Identify the case-specific assumption or failure mode before taking action.

Draft · approximately 40 minutes, excluding further revision.

Shared case and decision context

A fictional bank has CET1 capital 12 and risk-weighted assets 150. Gross loans are 200, nonperforming loans 8 and loss allowance 5. Management highlights rapid loan growth but does not provide maturity gaps or deposit concentration. These are teaching inputs, not a claim of regulatory compliance.

Economic or professional mechanism

Banks transform liquidity and maturity; leverage and funding composition therefore require specialized analysis. CET1/RWA is a risk-weighted capital measure, not equity/total assets. Asset quality requires delinquency, expected losses, collateral and concentration context. Ratios can improve through model or classification changes without a corresponding reduction in economic risk.

Apply, challenge and communicate

CET1 ratio is 8%, NPL ratio 4% and allowance/NPL 62.5%. None alone establishes solvency or liquidity. Request funding concentrations, asset-liability repricing gaps and stress assumptions. Insurance companies instead need attention to underwriting reserves, claims and investment portfolios; bank metrics cannot simply replace insurance analysis.

Capital, leverage and liquidity rules address different risks

Risk-based capital requirements weight assets and exposures by prescribed or approved risk measures. A leverage ratio adds a non-risk-weighted backstop, while liquidity metrics focus on resilience to cash outflows and structural funding. Regulatory minimums, buffers and local implementation must be checked for the actual bank and date. A high risk-weighted capital ratio can coexist with concentrated deposits or weak short-term liquidity. Do not infer compliance from this case’s8% CET1 result, which is a teaching calculation without jurisdictional requirements.

Read insurance underwriting and reserve risk

For a property-and-casualty insurer a simplified loss ratio is incurred claims/earned premiums and expense ratio is underwriting expenses/earned premiums. Claims70 and expenses25 on earned premiums100 give a95% combined ratio and5 underwriting profit before investment results. Reserve estimates can be revised years later, and catastrophe concentration or reinsurance collectability can dominate a favorable current ratio. Life insurers additionally require attention to long-duration guarantees, lapse assumptions and asset-liability matching. Compare like lines, accounting regimes and reinsurance treatment.

Formula and assumptions

CET1 ratio=CET1 capital/RWA; NPL ratio=NPL/gross loans

Case analysis with explicit assumptions

  1. A fictional bank has CET1 capital 12 and risk-weighted assets 150. Gross loans are 200, nonperforming loans 8 and loss allowance 5. Management highlights rapid loan growth but does not provide maturity gaps or deposit concentration. These are teaching inputs, not a claim of regulatory compliance.
  2. Method: CET1 ratio=CET1 capital/RWA; NPL ratio=NPL/gross loans
  3. Case result: 8.00%. CET1 ratio is 8%, NPL ratio 4% and allowance/NPL 62.5%. None alone establishes solvency or liquidity. Request funding concentrations, asset-liability repricing gaps and stress assumptions. Insurance companies instead need attention to underwriting reserves, claims and investment portfolios; bank metrics cannot simply replace insurance analysis.

Errors to catch

  • Do not replace the stated assumptions with an unstated shortcut. Reconcile units, timing and the claim being valued or duty being assessed.
  • Compliance with every country’s bank rules is not a defensible conclusion for these case facts.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.