FRM Part II · FRM Exam Part II · Credit Risk
Which feature of the Basel III reforms specifically aims to dampen procyclicality in bank lending by building capital in good times?
The countercyclical capital buffer is designed to dampen procyclicality. Supervisors raise it when system-wide credit growth is excessive, so banks build capital in good times, and release it in downturns so capital can absorb losses and support lending.
- ACountercyclical capital bufferCorrect
- BLeverage ratio
- CLiquidity coverage ratio
- DOutput floor
Explanation
The countercyclical buffer (0-2.5% of RWA) is raised when credit growth is excessive and released in downturns. The leverage ratio is a non-risk-based backstop, the LCR addresses liquidity, and the output floor limits model-based RWA benefits.
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