Skip to content

FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009

A regulator reviews post-crisis reforms intended to reduce procyclicality in the banking system. Which combination of Basel III measures most directly addresses procyclicality in credit supply?

The countercyclical capital buffer and capital conservation buffer most directly address procyclicality. The first builds extra capital in credit booms so it can absorb losses and be released in downturns, while the second restricts dividends and bonuses when capital falls, helping preserve lending capacity.

  1. AA countercyclical capital buffer built up during credit booms, plus a capital conservation buffer that restricts distributions when capital fallsCorrect
  2. BA higher risk weight on sovereign bonds, plus a ban on securitization
  3. CA liquidity coverage ratio, plus a requirement that all derivatives be exchange-traded
  4. DA fixed leverage ratio of 10%, plus mark-to-market accounting for all loans

Explanation

The countercyclical buffer raises capital requirements when credit growth is excessive, providing a cushion that can be released in downturns. The conservation buffer limits dividends and bonuses as capital erodes. The liquidity and derivatives measures target different problems, and the other options are not Basel III provisions.

Did you get it right without looking?

One question tells you little. A timed set on Anatomy of the Great Financial Crisis of 2007-2009 shows your real accuracy, how long you take and where you lose marks.

Practise Anatomy of the Great Financial Crisis of 2007-2009Free diagnostic mock

More Anatomy of the Great Financial Crisis of 2007-2009 questions