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

A risk manager at a mid-sized bank is briefing the board on the Basel III post-crisis finalisation package. Which of the following best describes a primary objective of these reforms?

A primary objective is to reduce excessive variability in risk-weighted assets and restore credibility in their calculation. This improves comparability across banks. The reforms constrain internal models rather than abolish them, and the leverage ratio remains a backstop, not a replacement for risk-based capital.

  1. ATo reduce excessive variability of risk-weighted assets and restore credibility in their calculationCorrect
  2. BTo eliminate the use of internal models for all risk types
  3. CTo raise the minimum leverage ratio to 20% for all banks
  4. DTo replace risk-based capital requirements with a leverage ratio alone

Explanation

The finalised reforms aimed to reduce excessive variability in RWAs and improve comparability and credibility of risk-based ratios. They did not abolish internal models entirely, nor replace risk-based capital with leverage. The leverage ratio is a 3% backstop, not 20%.

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