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

Under Basel III, a bank that is not a G-SIB has a 4.5% CET1 minimum, a 2.5% capital conservation buffer and a 1.0% countercyclical buffer currently set by its regulator. Its CET1 ratio is 7.5%. Which statement best describes the consequence?

The bank meets the 4.5% minimum but falls short of the 8.0% combined requirement including buffers. Being within the buffer zone triggers automatic restrictions on discretionary distributions such as dividends and bonuses, not an immediate breach of the minimum. Buffers must be met with CET1.

  1. AThe bank breaches the minimum CET1 requirement and must be resolved immediately
  2. BThe bank meets the minimum but is inside the buffer range, so distributions such as dividends and bonuses are restrictedCorrect
  3. CThe bank is fully compliant and may pay dividends without restriction because it exceeds 4.5%
  4. DThe bank must raise Tier 2 capital to restore the buffer

Explanation

The combined CET1 requirement including buffers is 4.5 + 2.5 + 1.0 = 8.0%. At 7.5% the bank is above the 4.5% minimum but below 8.0%, so automatic distribution constraints apply. Buffers must be met with CET1, so Tier 2 cannot cure the shortfall.

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