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FRM Part I · FRM Exam Part I · Banks

Under the Basel III framework, which of the following best describes the purpose of the capital conservation buffer?

The capital conservation buffer is an extra layer of CET1 capital above the regulatory minimum that banks can use to absorb losses in stress. When it is eroded, the bank faces restrictions on dividends, buybacks and bonuses until the buffer is rebuilt.

  1. AIt requires banks to hold liquid assets sufficient to cover 30 days of net cash outflows
  2. BIt is a capital layer above minimum requirements that can be drawn down in stress, with distributions restricted when it is depletedCorrect
  3. CIt caps a bank's total assets at a fixed multiple of its Tier 1 capital
  4. DIt is an additional charge applied to banks for their contribution to systemic risk only

Explanation

The conservation buffer is a CET1 buffer above the minimum, meant to absorb losses in stress. If a bank's capital falls into the buffer range, restrictions on dividends and bonuses apply. The first option describes the LCR, the third the leverage ratio, and the fourth the G-SIB surcharge.

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