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FRM Part II · FRM Exam Part II · High-level Summary of Basel III Reforms

A G-SIB leverage ratio buffer breach has occurred in a bank with Tier 1 capital meeting the 3% minimum but not the 3.5% total requirement. What is the main consequence under the Basel III framework?

The consequence is restrictions on discretionary distributions such as dividends, share buybacks and bonuses. Because the bank still meets the 3% minimum, it has used up its buffer rather than breached the minimum, and bucket allocation depends on systemic importance scores, not buffer usage.

  1. AAutomatic loss of its banking licence
  2. BRestrictions on discretionary distributions such as dividends and bonuses, rather than a breach of the minimumCorrect
  3. CMandatory conversion of all Tier 2 instruments into equity
  4. DImmediate reclassification of the bank to a lower G-SIB bucket

Explanation

The leverage buffer works like the risk-based capital buffers: falling into it, while still above the 3% minimum, triggers constraints on discretionary distributions. It does not itself force licence loss, conversion, or a bucket change, since bucket allocation depends on the indicator-based score.

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