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FRM Part II · FRM Exam Part II · High-level Summary of Basel III Reforms

A bank has a rated exposure to a foreign bank counterparty under the revised SA. External ratings are permitted in the jurisdiction. Which statement correctly describes the treatment of bank exposures under the External Credit Risk Assessment Approach (ECRA) versus the Standardised Credit Risk Assessment Approach (SCRA)?

ECRA applies to rated bank exposures and uses external ratings, whereas SCRA applies to unrated banks and requires the lending bank to classify the counterparty into Grade A, B or C through its own due diligence. The options that swap or merge the two approaches are wrong.

  1. AECRA applies to unrated banks, with grades A, B and C assigned by the bank's own due diligence
  2. BSCRA applies to rated banks, using external ratings only
  3. CECRA applies to rated banks using external ratings, while SCRA applies to unrated banks, classifying them into grades A, B and CCorrect
  4. DBoth approaches rely solely on external ratings, differing only in risk weights

Explanation

ECRA is used in jurisdictions allowing external ratings and relies on them for rated banks. SCRA is for unrated banks (and jurisdictions that do not permit ratings), requiring banks to classify counterparties into Grade A, B or C based on capital adequacy and other criteria. The first option reverses the two approaches.

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