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FRM Part II · FRM Exam Part II · Credit Risk

Which feature distinguishes the Basel III output floor from the other capital constraints?

The output floor requires a bank's internal-model RWA to be no less than a set percentage, 72.5%, of what the standardised approaches would produce. It limits the capital reduction from internal models and reduces variability, unlike the liquidity coverage ratio, leverage ratio or countercyclical buffer.

  1. AIt limits the capital benefit of internal models by requiring RWA to be at least a set percentage of the standardised-approach RWACorrect
  2. BIt requires banks to hold a minimum ratio of high-quality liquid assets to net cash outflows
  3. CIt sets a minimum ratio of Tier 1 capital to total unweighted exposures
  4. DIt adds a time-varying buffer when credit growth exceeds trend

Explanation

The output floor sets total RWA from internal models at no less than 72.5% of RWA computed under standardised approaches, curbing model-driven variability. Option B describes the LCR, C the leverage ratio, and D the countercyclical buffer.

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