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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

A supervisor evaluates a bank's argument that the finalised Basel III reforms are unnecessary because its internal models already show low RWAs. Which response best reflects the rationale of the reforms?

Unexplained dispersion in modelled RWAs across banks with similar portfolios undermines comparability and credibility of capital ratios. The reforms therefore constrain internal models and add an output floor based on standardised approaches. Low modelled RWAs alone do not prove better risk management, and the reforms covered more than credit risk.

  1. ALow modelled RWAs prove superior risk management and should justify lower floors
  2. BWide dispersion in modelled RWAs for similar portfolios, not explained by risk differences, undermines comparability, so constraints on models and a floor based on standardised approaches are warrantedCorrect
  3. CInternal models are inherently inaccurate for all exposures, so all banks must use the standardised approach exclusively
  4. DRWA variability matters only for credit risk, so market and operational risk frameworks were left unchanged

Explanation

The Committee found unwarranted variability in model-based RWAs for similar exposures, harming comparability and trust. Responses were input floors, restricted model use for some exposures, and an aggregate output floor. The reforms also revised market risk (FRTB), CVA and operational risk, so the last option is wrong.

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