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FRM Part II · FRM Exam Part II · High-level Summary of Basel III Reforms

A risk officer is briefing the board on the Basel III reforms finalised in December 2017. Which statement best describes the purpose of the transitional output floor arrangement?

The output floor is phased in gradually, starting at 50% and rising to 72.5% of standardised-approach risk-weighted assets. This lets banks with low internal-model RWA adjust their capital planning over several years rather than facing the full floor immediately.

  1. AIt phases in the floor on risk-weighted assets calculated using internal models, rising gradually to 72.5% of the standardised approach total over several yearsCorrect
  2. BIt sets a permanent 50% floor on internal model RWA relative to standardised RWA from the first day of implementation
  3. CIt phases in the leverage ratio buffer for G-SIBs over the same period as the capital conservation buffer
  4. DIt allows banks to exclude operational risk from the floor calculation until the end of the transition

Explanation

The output floor was designed to be phased in, starting at 50% and rising to 72.5% of standardised RWA at the end of the transition. A permanent 50% floor ignores the phase-in to 72.5%. The leverage ratio buffer and the operational risk exclusion are unrelated to the floor design.

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