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

A supervisor reviews the changes the Basel III finalisation made to the approaches for credit, market, and operational risk. Which of the following correctly describes a component of the reforms?

The finalisation replaced all existing operational risk approaches, including the Advanced Measurement Approach, with one standardised approach. The reforms also restricted internal models for credit risk, for example limiting advanced IRB for large corporates, and revised rather than removed the CVA framework.

  1. AThe Advanced Measurement Approach for operational risk was retained and made mandatory for all internationally active banks
  2. BThe internal ratings-based approach for credit risk was extended so that banks may use advanced IRB for all exposures including large corporates and equities
  3. CThe Credit Valuation Adjustment framework was removed and replaced by a leverage ratio buffer
  4. DA single standardised approach for operational risk replaced the existing approaches, including the Advanced Measurement ApproachCorrect

Explanation

The reforms replaced all existing operational risk approaches, including the AMA, with a single risk-sensitive standardised approach. Option B is reversed: the reforms restricted the use of advanced IRB for certain exposures such as large corporates and removed IRB for equities. Option C is wrong because the CVA framework was revised, not removed.

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