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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 Basel III reforms finalised after the global financial crisis. Which statement best describes the principal objective of the 2017 package of finalised reforms (often called the 'Basel III endgame' reforms)?

The finalised Basel III reforms mainly sought to restore credibility in the calculation of risk-weighted assets and make capital ratios more comparable across banks. They did this by limiting excessive variability from internal models, while keeping risk-based capital alongside a supplementary leverage ratio.

  1. ATo restore credibility in the calculation of risk-weighted assets and improve comparability of banks' capital ratiosCorrect
  2. BTo replace risk-based capital requirements entirely with a leverage-based requirement
  3. CTo remove the use of internal models for all risk categories, including market risk
  4. DTo raise the minimum total capital ratio from 8% to 12% for all banks

Explanation

The finalised reforms aimed to reduce excessive variability in risk-weighted assets and restore credibility in their calculation, improving comparability across banks. The leverage ratio supplements, not replaces, risk-based requirements. Internal models were constrained, not removed entirely, and the 8% minimum total capital ratio was not raised to 12%.

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