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FRM Part II · FRM Exam Part II · Capital Regulation Before the Global Financial Crisis

A regulator reviewing a bank's capital adequacy notes that the bank has complied with the minimum capital formula but the supervisor also assesses the bank's internal capital assessment process and may require capital above the minimum. Under the Basel II framework, which pillar governs this supervisory review?

Pillar 2, the supervisory review process, governs this. It lets supervisors evaluate a bank's internal capital assessment and require capital above the Pillar 1 minimum where risks are not fully captured. Pillar 1 sets minimum requirements and Pillar 3 covers disclosure to promote market discipline.

  1. APillar 1, minimum capital requirements
  2. BPillar 2, supervisory review processCorrect
  3. CPillar 3, market discipline
  4. DThe leverage ratio backstop

Explanation

Pillar 2 covers supervisory review, including the evaluation of a bank's internal capital adequacy assessment and the power to require capital above Pillar 1 minimums. Pillar 1 only sets the minimum formula, and Pillar 3 concerns disclosure. The leverage ratio was introduced in Basel III, not Basel II.

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