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FRM Part II · FRM Exam Part II · Capital Regulation Before the Global Financial Crisis

A risk analyst reviewing the original 1988 Basel Accord notes that a bank's OECD sovereign bond holdings and its loans to a BBB-rated corporate borrower attract different risk weights. Which statement correctly describes the risk weights under Basel I?

Under Basel I, claims on OECD central governments carried a 0% risk weight, while corporate loans carried a flat 100% regardless of the borrower's credit rating. This coarse bucketing ignored differences in credit quality within asset classes, which is a well-known weakness of the 1988 Accord.

  1. AOECD government claims carried 0% and corporate loans carried 100%, regardless of the borrower's credit ratingCorrect
  2. BOECD government claims carried 20% and corporate loans carried 50% if the borrower was investment grade
  3. COECD government claims carried 0% and corporate loans carried 100% only if the borrower was unrated
  4. DBoth OECD government claims and corporate loans carried 100% because Basel I had no differentiation

Explanation

Basel I used broad risk buckets (0%, 20%, 50%, 100%). OECD central government claims were 0% and ordinary corporate loans 100% irrespective of credit quality. The lack of sensitivity to borrower rating within the corporate class is a key weakness, which is why distractors suggesting rating-based differentiation are wrong.

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