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

A regulator raises the countercyclical capital buffer for a jurisdiction from 0% to 2% of RWA during a period of rapid credit growth. What is the primary purpose of this action?

The purpose is to build additional capital during credit booms so it can be released in a downturn, helping banks absorb losses while continuing to lend. It is an add-on to the minimum requirement and does not alter RWA or the leverage ratio.

  1. ATo increase capital in good times so it can be drawn down in a downturn to sustain lendingCorrect
  2. BTo replace the minimum CET1 requirement during stress
  3. CTo reduce the leverage ratio requirement for banks
  4. DTo permanently lower banks' risk-weighted assets

Explanation

The countercyclical buffer is a macroprudential tool built when credit growth is excessive and released in downturns to absorb losses and support lending. It adds to, not replaces, minimum requirements. It does not change RWA or the leverage ratio.

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