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

A bank's CFO asks why the Basel III finalisation revised the standardised approach for credit risk. Which is the most accurate rationale?

The revised standardised approach was made more granular and risk-sensitive and less mechanistically reliant on external credit ratings. For example, real estate exposures use loan-to-value bands. It does not remove differentiation, mandate internal ratings or apply a uniform risk weight.

  1. ATo make the standardised approach more granular and risk-sensitive and reduce mechanistic reliance on external ratingsCorrect
  2. BTo remove all risk differentiation between exposures for simplicity
  3. CTo require all banks to use internal ratings for every exposure
  4. DTo raise risk weights uniformly to 150% on all assets

Explanation

The revision increased granularity and risk sensitivity, for example by using loan-to-value for real estate, and reduced mechanistic reliance on external ratings. It did not remove differentiation, mandate internal ratings, or impose uniform 150% weights.

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