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FRM Part II · FRM Exam Part II · Capital Structure in Banks

During a credit upswing, a national supervisor observes the credit-to-GDP gap rising well above its long-term trend and raises the countercyclical capital buffer. What is the principal purpose of this action?

The purpose is to build extra CET1 capital during excessive credit growth so banks can absorb losses and keep lending when conditions turn. The countercyclical buffer is a macroprudential add-on to the minimum and other buffers, and it can be released in a downturn.

  1. ATo increase capital held against excess credit growth so it can absorb losses in a later downturnCorrect
  2. BTo replace the minimum CET1 requirement with a risk-insensitive floor
  3. CTo reduce the leverage ratio requirement for domestic banks
  4. DTo permit banks to count more Tier 2 instruments toward CET1

Explanation

The countercyclical buffer is a macroprudential tool built up when system-wide credit growth is excessive, and it can be released in stress to support lending. It is added on top of the minimum and other buffers, so it does not replace minimums, alter the leverage ratio or change capital eligibility.

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