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

Which consequence follows if a G-SIB's leverage ratio falls below its minimum plus G-SIB leverage buffer under Basel III?

A G-SIB that falls below its leverage minimum plus G-SIB buffer faces restrictions on distributions such as dividends and discretionary bonuses, scaled to the size of the shortfall. This mirrors how risk-based buffers work and does not cause automatic licence loss or conversion of instruments.

  1. AAutomatic loss of its banking licence
  2. BRestrictions on distributions, such as dividends, based on the shortfallCorrect
  3. CMandatory conversion of all Tier 2 instruments to equity
  4. DImmediate reclassification as a non-systemic bank

Explanation

Breaching the leverage buffer triggers constraints on capital distributions, such as dividends and discretionary bonuses, proportionate to the shortfall. It is not a licence-revocation event or an automatic conversion trigger. The buffer is designed to be drawn down in stress with restrictions rather than a hard failure.

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