medium · FRM Part 2 Operational Risk
A national regulator observes that while credit growth has remained flat, a sudden and severe contraction in real GDP has caused the Credit-to-GDP gap to rise above the 2% activation threshold.
According to the structural mechanics of early-warning signals, what is the primary risk of activating the CCyB in this scenario?
- The signal is failing to account for the wealth effect, leading to an understatement of required capital.
- The signal is correctly identifying a latent surge in systemic leverage that precedes a banking crisis.
- The signal indicates that the 'Credit' component of the ratio is too sensitive to through-the-cycle (TTC) adjustments.
- The signal is suffering from a mechanical 'denominator effect' that may trigger a procyclical credit crunch.
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