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FRM Part II · FRM Exam Part II · Solvency, Liquidity and Other Regulation After the Global Financial Crisis

During a credit boom, a national supervisor raises the countercyclical capital buffer for banks lending in its jurisdiction. What is the primary objective of this Basel III tool?

The countercyclical capital buffer is meant to build extra capital during periods of excessive credit growth so that it can be released in downturns, supporting lending and reducing procyclicality. It is a macroprudential capital tool, not a liquidity, concentration or leverage measure.

  1. ATo build additional capital when system-wide credit growth is excessive, so it can be released in downturns to support lendingCorrect
  2. BTo ensure banks hold enough high-quality liquid assets for 30 days of stress
  3. CTo limit each bank's exposure to a single counterparty
  4. DTo raise the minimum leverage ratio permanently for all banks

Explanation

The countercyclical buffer is a macroprudential tool that increases capital requirements when credit growth is excessive and can be released in stress to reduce procyclicality. The liquidity coverage ratio addresses liquidity, large exposure limits address concentration, and the buffer is not a permanent leverage change.

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