TIER 3

[kasoker]

HI DAVID

i noticed that in the 1st L2 webinar you said that there is a constraint with the ratio tier1to tier3' what is this ratio?

i know about he ratio tier1 to tier2 and that tier 3 is only for market, are there any more constraints that i need to know?

thanks

ktm

 

[joeisenb]

I think there is a recommendation that Tier 2 and 3 combined should be less than Tier 1.

 

[David Harper CFA FRM]

Hi ktm,

There are a few details in the actual framework and, further, pending proposals put the details in flux, but from an exam perspective, the FRM has a tendency only to refer to the two major constraints mentioned by Jorion:

* Tier 2 can't exceed (can't be > 100%) of Tier 1. So, if the credit risk charge is $10 MM, then up to $5 MM of that can be Tier 2 but no more.
* Tier 3 cannot be more than 2.5x (250%) of Tier 1 and only for market risk (as the question shows, this implies a max of 71.4% T3)

(e.g., here is a recent question I wrote that gives practice to the T3/T1. A typical question checks that you understand T3 is only for market risk)

Thanks,
David