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

A supervisor is assessing a bank's readiness for the final Basel III reforms. Which of the following correctly reflects how the transitional arrangements are intended to work?

The output floor rises gradually to its final level, and the cap on the RWA increase it causes is only temporary, ending when the transition finishes. After that the full floor applies, which prevents the cap from permanently weakening the floor.

  1. AThe output floor is phased in, and the cap on its RWA impact is a temporary measure that is withdrawn after the transition endsCorrect
  2. BThe output floor applies immediately at 72.5%, while the cap on its impact is phased in over several years
  3. CThe cap on the floor's RWA impact is permanent, so the floor never fully binds on any bank
  4. DTransitional arrangements apply only to the leverage ratio and not to the output floor

Explanation

The floor is phased in and the cap on its increase in RWA is a transitional device, removed once the phase-in ends so the full floor applies. The immediate 72.5% option contradicts the phase-in. A permanent cap would defeat the floor's purpose.

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