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

Under the Basel III finalisation framework, a bank's output floor requires total RWA to be at least a stated percentage of RWA computed using the standardised approaches. When fully phased in, what is that percentage, and what is its purpose?

The fully phased-in output floor is 72.5% of RWA computed under the standardised approaches. It applies to total RWA and limits how much capital benefit a bank can gain from internal models, reducing variability and improving comparability across institutions. It is not applied separately to each risk category.

  1. A50%, to limit the use of internal models for operational risk only
  2. B80%, to ensure each risk category is individually floored at the standardised level
  3. C72.5%, to limit the capital benefit a bank can obtain from using internal models relative to standardised approachesCorrect
  4. D90%, to prevent any use of internal ratings-based approaches

Explanation

The output floor is set at 72.5% of standardised RWA when fully phased in. It constrains the extent to which internal models can reduce capital relative to the standardised approaches. It applies to total RWA, not each risk category, so option B is wrong.

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