Skip to content

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

Under the Basel III post-crisis reforms, a bank using the revised standardised approach for credit risk (SA-CR) wants to lower its dependence on external credit ratings. Which feature of the revised framework best reflects this objective?

The revised standardised approach reduces mechanistic reliance on external ratings by requiring bank due diligence on rated exposures and providing defined treatments for unrated exposures. It does not abolish risk weights or impose a flat weight; it adds granularity and own-assessment elements alongside ratings.

  1. AIt requires banks to use only internal models for all corporate exposures
  2. BIt introduces a due diligence requirement and a non-rated corporate treatment based on a standard risk weight, plus an option for rating-free approaches for certain exposuresCorrect
  3. CIt eliminates risk weights for all sovereign exposures denominated in domestic currency
  4. DIt assigns a single flat 100% risk weight to every exposure class

Explanation

The revised SA-CR reduces mechanistic reliance on external ratings by requiring banks to perform their own due diligence on rated exposures and by giving risk-weight treatments for unrated exposures (such as the Standardised Credit Risk Assessment Approach for banks and fixed weights for unrated corporates). It does not remove internal models for all corporates, nor remove sovereign risk weights globally, nor use a flat 100% weight.

Did you get it right without looking?

One question tells you little. A timed set on High-level Summary of Basel III Reforms shows your real accuracy, how long you take and where you lose marks.

Practise High-level Summary of Basel III ReformsFree diagnostic mock

More High-level Summary of Basel III Reforms questions