Explanation

Correct Answer: B (Only I but not II)

Analysis of the Two Buffers:

I. Capital Conservation Buffer (2.5% of RWA)

• This buffer is designed to "promote the conservation of capital and the build-up of adequate buffers above the minimum that can be drawn down in periods of stress"
• It creates a capital buffer that banks must maintain above minimum requirements
• During normal times, banks build up this buffer, and during stress periods, they can draw it down
• This directly addresses the stated objective in the question

II. Countercyclical Buffer (0-2.5% of RWA)

• This buffer is specifically designed to reduce procyclicality in the banking system
• It is activated during periods of excessive credit growth to build up capital buffers
• When credit conditions normalize, the buffer can be released
• This directly addresses the procyclicality aspect mentioned in the question

Why Only Statement I is Correct:

The question specifically asks which buffer implements the function of "promote the conservation of capital and the build-up of adequate buffers above the minimum that can be drawn down in periods of stress" - this description perfectly matches the Capital Conservation Buffer (Statement I).

While the Countercyclical Buffer (Statement II) does address procyclicality, it is not primarily designed for the capital conservation function described in the question.

Basel III Buffer Framework:

• Capital Conservation Buffer: Mandatory buffer to ensure banks maintain capital above minimum requirements
• Countercyclical Buffer: Discretionary buffer to address systemic risk from excessive credit growth
• Both buffers work together but serve different primary purposes in the Basel III framework