Which items are included as main components of Basel III’s capital framework to strengthen loss-absorbing capacity?

• A. Tier 1 and Tier 2 capital, risk-weighted assets, capital conservation buffer, and countercyclical capital buffer
• B. Liquidity Coverage Ratio and Net Stable Funding Ratio
• C. Leverage ratio and credit risk mitigation
• D. Market risk capital requirement

Answer: (A)

Basel III strengthens loss-absorbing capacity by tying capital to risk and by adding buffers that ensure banks have extra resources during good times to cover losses in downturns. The main pieces are the capital that banks hold, composed of high-quality Tier 1 capital (and the inclusion of Tier 2 capital as supplementary), measured against risk-weighted assets. In addition, Basel III introduces buffers that sit on top of the minimum capital level: a capital conservation buffer and a countercyclical capital buffer. These together push banks to maintain robust capital levels and to build extra firepower to absorb losses when stress hits.

Liquidity measures like the Liquidity Coverage Ratio and Net Stable Funding Ratio, while important for resilience, address liquidity risk rather than the capital framework itself. The leverage ratio is a separate guardrail to prevent excessive leverage, and market risk capital deals with charges for market risk; neither captures the combined set of elements described in the main Basel III capital framework alongside the buffers.