FRM Part I · FRM Exam Part I · Banks
Which of the following best describes the purpose of a capital conservation buffer in Basel III?
The capital conservation buffer is additional CET1 capital held above regulatory minimums. If a bank dips into it, restrictions apply to discretionary payouts such as dividends, share buybacks and bonuses, helping preserve capital in stress.
- AIt is extra capital that, once breached, restricts discretionary distributions such as dividends and bonusesCorrect
- BIt is a liquidity reserve of high-quality liquid assets covering 30 days of outflows
- CIt is a cap on the ratio of Tier 1 capital to total exposure
- DIt is a requirement that banks hold capital only against trading book positions
Explanation
The conservation buffer is CET1 held above the minimum; falling into it limits dividends, buybacks and bonuses. The liquidity reserve describes the LCR, and the exposure-based cap describes the leverage ratio.
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