Skip to content

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

A risk officer is summarising why the Basel Committee launched the Fundamental Review of the Trading Book after the global financial crisis. Which of the following was a key weakness in the pre-crisis trading book framework that FRTB aimed to correct?

FRTB addressed the weak, intent-based boundary between trading and banking books, which let banks arbitrage capital by choosing the book with the lower charge. The new framework uses a more objective boundary with presumptive lists and restricts reclassification of positions.

  1. AThe boundary between trading book and banking book relied on management intent and could be exploited for capital arbitrageCorrect
  2. BThe framework required all positions to be capitalised using standardised risk weights only
  3. CThe framework prohibited banks from using internal models for market risk
  4. DThe framework applied the same capital charge to trading book and banking book positions regardless of liquidity

Explanation

The pre-crisis boundary was based on trading intent, which allowed banks to move positions between books to reduce capital. FRTB introduced a stricter boundary with presumptions. The other options misdescribe the old regime, which permitted internal models and had lower trading book charges.

Did you get it right without looking?

One question tells you little. A timed set on Fundamental Review of the Trading Book shows your real accuracy, how long you take and where you lose marks.

Practise Fundamental Review of the Trading BookFree diagnostic mock

More Fundamental Review of the Trading Book questions