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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

A bank's risk officer is briefing the board on the main objectives of the Basel III post-crisis finalisation package (2017). Which statement best captures one of its core objectives?

A core objective of the Basel III finalisation was to reduce excessive variability in risk-weighted assets and improve comparability of capital ratios across banks. It limited internal model use rather than abolishing it, and kept the leverage ratio as a backstop alongside risk-based requirements.

  1. ATo reduce excessive variability of risk-weighted assets and improve comparability of banks' capital ratiosCorrect
  2. BTo eliminate the use of internal models for all risk types
  3. CTo raise the minimum leverage ratio to 10% for all banks
  4. DTo replace risk-based capital requirements entirely with the leverage ratio

Explanation

The finalisation reforms aimed to restore credibility in the calculation of RWAs by reducing unwarranted variability and improving comparability across banks. Internal models were constrained, not eliminated, and the leverage ratio is a supplementary backstop rather than a replacement.

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