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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

Under the Basel III finalisation package, an output floor is introduced. Which description is correct?

The output floor requires a bank's total RWA, calculated with internal models, to be at least 72.5% of the RWA computed under the standardised approaches. It works at the aggregate level, acting as a backstop against excessive model-driven capital reductions.

  1. ATotal RWA calculated using internal models cannot fall below 72.5% of RWA calculated using the standardised approachesCorrect
  2. BEach individual risk-weighted exposure must be at least 72.5% of its leverage exposure
  3. CInternal-model RWA must be at least 72.5% of the bank's total assets
  4. DTotal capital must be at least 72.5% of standardised RWA at the Tier 1 level

Explanation

The output floor sets aggregate RWA, after model use, at no less than 72.5% of RWA computed under the standardised approaches. It applies to total RWA, not to individual exposures, and is not tied to total assets.

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