Skip to content

FRM Part II · FRM Exam Part II · Credit Scoring and Rating

A bank using the foundation IRB approach wants to rely on its internal ratings for regulatory capital. Which of the following is a Basel requirement for the use of internal ratings?

Basel requires the use test: internal ratings and default estimates must play an essential role in credit approval, risk management, internal capital allocation and corporate governance, not merely be computed for regulatory capital. Quarterly supervisory sign-off and agency matching are not requirements.

  1. AInternal ratings need only be used for regulatory capital and not in credit approval or pricing
  2. BRatings must play an essential role in credit approval, risk management, internal capital allocation, and governance (the use test)Correct
  3. CRatings must be reviewed by the supervisor each quarter before use
  4. DRatings must be identical to those of at least one external agency

Explanation

Basel's use test requires internal ratings and default estimates to play an essential role in approvals, risk management, capital allocation and corporate governance, not just capital calculation. Supervisors do not approve quarterly, and matching external agencies is not required.

Did you get it right without looking?

One question tells you little. A timed set on Credit Scoring and Rating shows your real accuracy, how long you take and where you lose marks.

Practise Credit Scoring and RatingFree diagnostic mock

More Credit Scoring and Rating questions