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FRM Part II · FRM Exam Part II

Solvency, Liquidity and Other Regulation After the Global Financial Crisis

This chapter covers the rules written after 2008 to keep banks solvent and liquid: Basel III capital and leverage ratio, LCR and NSFR, G-SIB and TLAC rules, stress testing, Dodd-Frank, and Basel III finalization. To solve questions, identify the rule, compute the ratio, and compare it with the minimum.

What this chapter covers

This chapter is about the regulatory response to the 2008 global financial crisis. It has two aims. First, make banks hold more and better capital, which is solvency. Second, make banks hold enough liquid assets and stable funding, which is liquidity. Other rules deal with systemic banks, stress testing, derivatives and proprietary trading.

The topics build on each other. Basel III capital and the leverage ratio come first because they define the capital that every other rule refers to. LCR and NSFR then add the liquidity side. G-SIB, D-SIB and TLAC rules apply extra requirements to big banks and set out how failing ones are resolved. Stress testing (CCAR, DFAST) tests whether capital holds up in a severe scenario. Dodd-Frank, the Volcker Rule and derivatives reform cover the US legal response. Basel III finalization changes how risk-weighted assets are calculated, including the operational risk standard.

The chapter links to the rest of the paper in several ways. Market risk, credit risk and operational risk chapters supply the measures that feed capital requirements. Liquidity and Treasury Risk uses the same LCR and NSFR ideas. Current Issues questions on private credit or digital assets often ask how regulation applies. Expect applied questions where you compute a ratio and say whether a bank complies.

Regulation questions are among the more predictable parts of FRM Part II because they rest on defined ratios, minimums and definitions. All 80 questions carry equal weight, so a topic where you can compute and recall precisely is worth the effort. The same concepts, such as CET1, buffers, HQLA and stress outflows, also appear in the credit, market, operational and liquidity topics. Mastering them here helps you across the paper. Candidates who only skim the definitions tend to lose marks on small details, such as which assets count or which buffer applies.

Solvency, Liquidity and Other Regulation After the Global Financial Crisis: topics in the order to study them

  1. 1Basel III Capital Reforms and Leverage RatioIt defines CET1, Tier 1, buffers and the leverage ratio, which every later topic builds on.
  2. 2Liquidity Coverage Ratio and Net Stable Funding RatioIt adds the liquidity side of Basel III, using the same ratio-versus-minimum logic.
  3. 3G-SIBs, D-SIBs and TLACIt layers surcharges and loss-absorbing capacity on top of the capital rules you already know.
  4. 4Stress Testing and Capital Planning (CCAR, DFAST)It tests whether the capital and buffers you learned hold in a severe scenario.
  5. 5Dodd-Frank Act, Volcker Rule and Derivatives ReformIt is the US legal framework that created the stress tests and other post-crisis rules, so it makes more sense after them.
  6. 6Basel III Finalization and Operational Risk CapitalIt revises how risk-weighted assets and operational risk capital are computed, so study it last once the original framework is clear.

How to prepare Solvency, Liquidity and Other Regulation After the Global Financial Crisis

Treat this chapter as a set of rules you can compute and compare. Build a one-page sheet of definitions and minimums, then practise applying them.

  1. Read the topics in the study order above, and write each rule's purpose in one line before learning any numbers.
  2. Build a sheet of ratios: CET1, Tier 1, total capital, buffers, leverage ratio, LCR and NSFR. For each, write the formula, the minimum and what counts in the numerator and denominator.
  3. Practise short calculations. For example, LCR = stock of HQLA ÷ total net cash outflows over 30 days, and the minimum is 100%. NSFR = available stable funding ÷ required stable funding, also at least 100%.
  4. Learn the differences between similar items: Level 1 versus Level 2 assets, G-SIB versus D-SIB, CCAR versus DFAST, and the old versus the finalized operational risk approach.
  5. For stress testing and Dodd-Frank, focus on what each tool does, who it applies to and what happens if a bank fails it.
  6. Do applied MCQs under time. After each miss, note whether it was a definition error, a calculation error or a misread question.
  7. In the last days, revisit only your ratio sheet and your error log.

Common mistakes in Solvency, Liquidity and Other Regulation After the Global Financial Crisis

  • Mixing up the numerator and denominator of LCR and NSFR

    Fix: Remember that LCR compares liquid assets with 30-day outflows, while NSFR compares available stable funding with required stable funding.

  • Treating the leverage ratio as risk-sensitive

    Fix: State that the leverage ratio uses an exposure measure with no risk weights, so it backstops the risk-based ratios.

  • Confusing which buffer or surcharge goes with which rule

    Fix: Write the purpose and trigger of each buffer on your sheet and note that the buffers are met with CET1.

  • Blurring CCAR and DFAST

    Fix: Remember that DFAST is the stress test required under Dodd-Frank, while CCAR adds a review of capital planning and planned distributions.

  • Getting the rule right but the interpretation wrong

    Fix: Always compare with the minimum, say whether the bank complies and name the likely consequence or action.

  • Learning pre-finalization operational risk approaches as current

    Fix: Study the finalized standardized approach as the current framework and treat the earlier approaches as history.

Last-day revision: Solvency, Liquidity and Other Regulation After the Global Financial Crisis

  • Leverage ratio = Tier 1 capital ÷ total exposure measure, a non-risk-based backstop with a Basel minimum of 3%.
  • CET1 is the highest quality capital, mainly common equity and retained earnings.
  • The capital conservation buffer is 2.5% of risk-weighted assets, held in CET1.
  • LCR = HQLA ÷ net cash outflows over a 30-day stress period, minimum 100%.
  • NSFR = available stable funding ÷ required stable funding over one year, minimum 100%.
  • LCR is short term and about liquid assets; NSFR is longer term and about funding structure.
  • G-SIBs face higher loss absorbency surcharges based on their systemic importance.
  • TLAC requires G-SIBs to hold enough loss-absorbing capacity to be recapitalized in resolution.
  • D-SIBs are identified by national authorities for domestic systemic importance.
  • DFAST and CCAR are US stress-testing programmes; CCAR also reviews capital planning and distributions.
  • The Volcker Rule restricts proprietary trading and certain fund investments by banks.
  • Basel III finalization revises risk-weighted asset calculation and replaces earlier operational risk approaches with a standardized approach.

Solvency, Liquidity and Other Regulation After the Global Financial Crisis practice questions

Solvency, Liquidity and Other Regulation After the Global Financial Crisis in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Solvency, Liquidity and Other Regulation After the Global Financial Crisis: frequently asked questions

How should I study this chapter for FRM Part II?

Start with Basel III capital, then liquidity ratios, systemic bank rules, stress testing, Dodd-Frank and finalization. Keep a one-page sheet of ratios and minimums. Practise applied MCQs and log every error.

Do I need to memorize numbers in this chapter?

Yes, for the core ones, such as the 100% minimums for LCR and NSFR and the 2.5% conservation buffer. Just as important is knowing what each ratio measures. Questions often ask you to compute a ratio and interpret it.

How does this chapter connect to other FRM Part II topics?

Capital rules draw on the market, credit and operational risk measures. The liquidity ratios overlap with Liquidity and Treasury Risk. Current Issues questions can also ask how regulation applies to new areas such as private credit or crypto.

Is the Volcker Rule or Basel III more important?

Both can appear, but Basel III is the foundation, because capital and liquidity ratios are used across the paper. Know the Volcker Rule at the level of what it restricts and why.