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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

A risk committee is reviewing why the Basel Committee finalised the post-crisis reforms in December 2017. Which statement best describes a central objective of the finalised package?

A central objective was to reduce excessive variability in risk-weighted assets and restore credibility in how RWAs and capital ratios are calculated, improving comparability across banks. Internal models were restricted rather than abolished, and the leverage ratio supplements risk-based capital instead of replacing it.

  1. ATo reduce excessive variability in risk-weighted assets and restore credibility in the calculation of risk-weighted assets and bank capital ratiosCorrect
  2. BTo eliminate the use of internal models for all risk types and require a single standardised approach everywhere
  3. CTo replace risk-based capital requirements entirely with a leverage ratio
  4. DTo raise the minimum Common Equity Tier 1 ratio from 4.5% to 7% for all banks

Explanation

The finalised reforms aimed to reduce unwarranted variability in RWAs across banks and improve comparability and credibility of capital ratios. Internal models were constrained, not eliminated, and the leverage ratio complements rather than replaces risk-based capital. The minimum CET1 ratio was set earlier in Basel III.

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