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FRM Part II · FRM Exam Part II · Credit Scoring and Rating

Under Basel IRB requirements, which feature is expected of a bank's internal rating system for corporate exposures?

Basel IRB expects independent review of rating assignments and the rating process, with ratings updated at least annually. Ratings cannot be frozen at origination or merely copied from external agencies, since the bank must show its own meaningful, regularly reviewed differentiation of borrower risk.

  1. ARating assignments and the process must be independently reviewed regularly, and ratings must be updated at least annuallyCorrect
  2. BRatings may be set once at origination and not revisited unless a default occurs
  3. CRatings must be identical to those of external rating agencies for the same obligor
  4. DRatings are only needed for exposures above a bank's total capital

Explanation

Basel IRB standards require a meaningful differentiation of risk, independent review of ratings and the rating process, and periodic updating, at least annually. External ratings may be an input but need not be copied, and ratings cannot be frozen at origination.

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