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

A regulator reviewing a bank's internal capital adequacy assessment process (ICAAP) concludes that the bank's concentration risk in a single sector is not captured by minimum requirements and asks it to hold additional capital. Which Basel II pillar does this action primarily represent?

This is Pillar 2, the supervisory review process. Supervisors evaluate a bank's internal capital assessment and can require extra capital for risks, such as concentration, that Pillar 1 minimum requirements do not fully capture. Pillar 3 covers disclosure, not capital add-ons.

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

Explanation

Pillar 2 requires banks to assess overall capital adequacy relative to their risk profile and empowers supervisors to require capital above the Pillar 1 minimum for risks not fully captured, such as concentration risk. Pillar 1 only sets the minimum rules. Pillar 3 concerns disclosure, and the leverage ratio was not part of Basel II.

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