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FRM Part II · FRM Exam Part II · Capital Regulation Before the Global Financial Crisis

Under Basel II, which of the following is a Pillar 3 requirement rather than a Pillar 1 or Pillar 2 element?

Public disclosure of capital structure, risk exposures and capital adequacy is the Pillar 3 requirement. Pillar 3 promotes market discipline by letting participants assess a bank's risk profile. Capital calculations such as operational risk and internal ratings are Pillar 1, and supervisory add-ons are Pillar 2.

  1. ACalculating capital for operational risk using the standardised approach
  2. BPublic disclosure of capital structure, risk exposures and capital adequacy to allow market participants to assess the bankCorrect
  3. CSupervisory power to impose capital above the minimum where a bank's risks warrant it
  4. DUse of internal ratings to derive probability of default for credit exposures

Explanation

Pillar 3 aims at market discipline through disclosure of capital structure, risk exposures and adequacy. Operational risk calculations and internal ratings are Pillar 1 matters, while the supervisory add-on power belongs to Pillar 2.

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