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FRM Part II · FRM Exam Part II · Capital Structure in Banks

A bank must hold a 4.5% CET1 minimum, a 2.5% capital conservation buffer, a 1.0% G-SIB surcharge, and a 1.0% countercyclical buffer. Its CET1 ratio is 8.5%. Which statement best describes the consequence under Basel III buffer rules?

The bank is above the 4.5% minimum but below its 9.0% combined requirement, so it is in the buffer zone. Automatic constraints on discretionary distributions such as dividends, buybacks and bonuses apply until buffers are rebuilt with CET1 capital.

  1. AIt breaches the minimum requirement and must be closed down
  2. BIt meets the minimum but is inside the buffer range, so distributions are constrainedCorrect
  3. CIt has no restrictions because the CET1 ratio exceeds 4.5%
  4. DIt must raise Tier 2 capital to restore compliance

Explanation

The combined CET1 requirement including buffers is 4.5 + 2.5 + 1.0 + 1.0 = 9.0%. At 8.5% the bank is above the 4.5% minimum but within the buffer zone, so restrictions on dividends, buybacks and bonuses apply, scaled to the shortfall. Closure is not triggered, and buffers must be met with CET1, not Tier 2.

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