Skip to content

FRM Part II · FRM Exam Part II · Liquidity and Leverage

Which statement best describes why a leverage ratio is used alongside risk-weighted capital requirements?

A leverage ratio serves as a simple non-risk-based backstop to risk-weighted capital. Because it ignores risk weights, it limits balance-sheet expansion even when risk weights or internal models understate risk. It complements, rather than replaces, risk-based requirements.

  1. AIt is a non-risk-based backstop that limits balance-sheet growth when risk weights understate riskCorrect
  2. BIt replaces risk-weighted capital entirely in Basel III
  3. CIt measures only liquidity coverage over a 30-day horizon
  4. DIt is calculated on risk-weighted assets to enhance risk sensitivity

Explanation

The leverage ratio does not depend on risk weights, so it constrains total exposure even when models or weights understate risk. It supplements rather than replaces risk-based capital, is not a liquidity measure, and does not use RWA.

Did you get it right without looking?

One question tells you little. A timed set on Liquidity and Leverage shows your real accuracy, how long you take and where you lose marks.

Practise Liquidity and LeverageFree diagnostic mock

More Liquidity and Leverage questions