FRM Part II · FRM Exam Part II · High-level Summary of Basel III Reforms
A risk officer at a mid-sized bank is briefing the board on the 2017 Basel III finalisation package. Which statement best describes the principal objective of the reforms relating to risk-weighted assets (RWA)?
The main aim of the Basel III finalisation reforms on RWA is to reduce excessive variability in risk-weighted assets and restore credibility and comparability of capital ratios across banks. The leverage ratio acts as a backstop, not a replacement, and the CET1 minimum and NSFR came from the earlier 2010 package.
- ATo reduce excessive variability in RWA and restore credibility in the calculation of risk-weighted assets and the comparability of capital ratios across banksCorrect
- BTo eliminate the use of risk-weighted measures entirely and rely only on the leverage ratio
- CTo raise the minimum Common Equity Tier 1 ratio from 4.5% to 8% for all banks
- DTo introduce a net stable funding requirement for the first time
Explanation
The finalisation reforms were designed mainly to address unwarranted variability in RWA across banks, improving comparability and credibility of risk-based ratios. Option B is wrong because the leverage ratio is a backstop to, not a replacement for, risk-weighted measures. The CET1 minimum and the NSFR were introduced in the earlier Basel III package (2010).
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