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

Under the Basel III post-crisis reforms, the output floor is intended primarily to achieve which of the following?

The output floor limits how far internal models can reduce a bank's risk-weighted assets below the standardised approaches. By setting a lower bound relative to standardised RWA, it curbs excessive model-driven capital benefits and improves comparability, without replacing the leverage ratio or mandating standardised approaches.

  1. ALimit the capital benefit a bank can obtain from internal models relative to the standardised approachesCorrect
  2. BRemove the need for banks to hold any capital buffers above minimum requirements
  3. CReplace the leverage ratio as the main backstop to risk-weighted capital
  4. DRequire all banks to use the standardised approach for every risk category

Explanation

The output floor sets a lower bound on total RWA calculated using internal models, expressed as a percentage of RWA under the standardised approaches. It constrains model-driven variability and reduces the capital advantage of internal models. It does not replace the leverage ratio or force all banks onto standardised approaches.

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