FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms
A bank using the IRB approach has a corporate exposure with a modelled PD of 0.01%. Under the finalised Basel III framework, which PD floor applies to this exposure for capital calculation?
The applicable PD floor is 0.05%, or 5 basis points, for corporate exposures under finalised Basel III. The modelled 0.01% is below it, so 0.05% must be used in the risk-weight formula. The old 0.03% floor was superseded by the reforms.
- A0.01%
- B0.03%
- C0.05%Correct
- D0.10%
Explanation
The finalised framework sets a PD floor of 5 basis points (0.05%) for corporate and bank exposures (and for most non-revolving retail). The modelled 0.01% is therefore raised to 0.05%. The 0.03% was the pre-reform floor, so that option reflects the superseded rule.
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