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

Supervisors in a jurisdiction wish to ease the transition to the Basel III output floor for banks whose capital would otherwise rise sharply. Which feature of the Basel III reforms specifically addresses this concern?

Basel III includes a transitional cap allowing authorities to limit the increase in a bank's total RWA caused by the output floor to 25% of its RWA before applying the floor. This smooths the impact on capital, while the other options are not part of the framework.

  1. AA cap on the transitional increase in a bank's total RWA attributable to the floor, at 25% of the RWA before applying the floorCorrect
  2. BA permanent exemption from the floor for banks with CET1 above 15%
  3. CReplacement of the floor with a higher countercyclical buffer
  4. DDelayed application of the leverage ratio to banks subject to the floor

Explanation

Basel allows national authorities to cap the increase in a bank's total RWA resulting from the floor at 25% of RWA before the floor, as a transitional measure. The other options do not exist in the framework.

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