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FRM Part II · FRM Exam Part II · Fundamental Review of the Trading Book

A risk analyst notes that under Basel 2.5 the trading book capital for securitization positions was criticized as inadequate and inconsistent with the banking book. Which FRTB feature most directly responds to the criticism about inconsistent capital treatment across the two books?

FRTB responded by making the standardized approach more risk-sensitive, serving as a credible fallback and floor for internal models, and by tightening the trading/banking book boundary. This reduces arbitrage and inconsistency between books, unlike allowing free choice of book or removing charges for hedges.

  1. AAllowing banks to choose freely which book each position belongs to
  2. BA standardized approach designed to be a credible fallback and floor for internal models, with a more objective boundaryCorrect
  3. CEliminating capital charges for hedged positions
  4. DUsing only accounting valuation categories to set capital

Explanation

FRTB made the standardized approach more risk-sensitive and mandatory for reporting alongside internal models, serving as a fallback and basis for floors, and tightened the boundary to reduce arbitrage. Free choice of book would worsen inconsistency, and the other options are not FRTB features.

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