Economics • Banking & FinanceHard
What does the term 'Basel III Capital Conservation Buffer (CCB)' require banks to maintain over and above minimum capital requirements?
A. A buffer of high-quality liquid assets to survive a 30-day severe stress scenario.
B. A cushion of Tier 1 capital built up during normal times to be drawn down during periods of financial and economic stress.✓ Correct Answer
C. A mandatory reserve fund deposited directly with the central bank to offset foreign exchange fluctuations.
D. An emergency credit line guaranteed by the sovereign government.
💡 Solution & Explanation
The Basel III Capital Conservation Buffer mandates that commercial banks hold an additional layer of high-quality Tier 1 capital during stable economic periods to absorb unexpected losses during downturns. Other choices referring to liquidity ratios or central bank deposit reserves pertain to distinct regulatory requirements like the Liquidity Coverage Ratio or Cash Reserve Ratio. Confusing this buffer with sovereign guarantees misunderstands its internal capital accumulation purpose. Breaching this buffer triggers constraints on capital distributions such as dividend payouts.
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