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

Under the finalised Basel III leverage ratio framework, a G-SIB has a leverage ratio buffer applied on top of the 3% minimum. If the G-SIB's higher-loss-absorbency risk-weighted requirement is 2.0%, what is the leverage ratio buffer and how must it be met?

The buffer is 1.0% of the exposure measure, met with CET1 capital. The G-SIB leverage ratio buffer is set at 50% of the bank's risk-weighted HLA add-on, so half of 2.0% gives 1.0%, taking the total requirement to 4%.

  1. A1.0% of exposure measure, met with Tier 1 capital of any form
  2. B2.0% of exposure measure, met with total capital
  3. C1.0% of exposure measure, met with CET1 capitalCorrect
  4. D3.0% of exposure measure, met with CET1 capital

Explanation

The G-SIB leverage ratio buffer equals 50% of the bank's risk-weighted higher-loss-absorbency add-on: 0.5 x 2.0% = 1.0%. It must be met with Tier 1 capital in the form of CET1. Thus the total requirement is 4%. Options with 2% or total capital misstate the calibration or eligible capital.

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