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FRM Part I · FRM Exam Part I · Banks

Under Basel III, the capital conservation buffer is designed primarily to do which of the following?

The capital conservation buffer limits discretionary payouts like dividends, buybacks and bonuses when a bank's CET1 capital falls into the buffer range above the minimum requirement. It is meant to build capital in good times so it can absorb losses in stress. Liquidity and leverage rules serve different purposes.

  1. ARequire banks to hold a fixed minimum of liquid assets against 30-day outflows
  2. BRestrict discretionary distributions such as dividends and bonuses when CET1 falls into the buffer rangeCorrect
  3. CCap a bank's total exposure at a multiple of its Tier 1 capital regardless of risk weights
  4. DForce banks to raise capital countercyclically when credit growth is excessive

Explanation

The conservation buffer (2.5% of RWA in CET1) sits above the minimum requirement; when a bank dips into it, restrictions on dividends, buybacks and bonuses apply. The first option describes the liquidity coverage ratio, the third the leverage ratio, and the fourth the countercyclical buffer.

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