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FRM Part II · FRM Exam Part II · Capital Regulation Before the Global Financial Crisis

Under the original 1988 Basel Accord, a bank must hold total capital of at least a stated percentage of risk-weighted assets. Which statement correctly describes this minimum and its composition?

Basel I required total capital of at least 8% of risk-weighted assets, with Tier 1 capital making up at least 4%. The 6% Tier 1 requirement belongs to Basel III, and Basel I measured capital against risk-weighted assets rather than total assets.

  1. A8% of risk-weighted assets, with at least 4% in Tier 1 capitalCorrect
  2. B8% of risk-weighted assets, with at least 6% in Tier 1 capital
  3. C4% of total assets, with at least 2% in Tier 1 capital
  4. D10% of risk-weighted assets, with at least 5% in Tier 1 capital

Explanation

Basel I set total capital (Tier 1 plus Tier 2) at a minimum of 8% of risk-weighted assets, of which at least half (4%) had to be Tier 1. The 6% Tier 1 figure comes from the later Basel III framework, not Basel I.

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