FRM Part II · FRM Exam Part II · Liquidity and Leverage
A regulator wants to reduce procyclicality of leverage in the financial system. Which measure is most consistent with that goal?
Setting haircuts and margins through the cycle, rather than letting them jump with current volatility, limits forced deleveraging in stress. Stable requirements and countercyclical buffers reduce the feedback between falling prices and tighter funding, dampening procyclicality in leverage.
- ARequiring haircuts and margins to be set through the cycle rather than rising sharply with current volatilityCorrect
- BAllowing margin requirements to rise automatically with short-term market volatility
- CRemoving all leverage limits during booms to support credit growth
- DRelying exclusively on mark-to-market capital ratios with no buffers
Explanation
Margins that increase as volatility spikes force deleveraging in downturns, amplifying the cycle. Through-the-cycle haircuts and countercyclical buffers keep requirements stable and build capacity in good times. The other options increase procyclicality.
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