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

Under the Basel III reforms, which statement best describes a key change to the CVA risk framework compared with the Basel II/2.5 approach?

The reforms removed the internal-model advanced CVA approach. Banks now apply either the basic approach (BA-CVA) or, with supervisory approval, the standardised approach (SA-CVA). The charge was not abolished and still applies to OTC derivative counterparty exposures, not just to central counterparties.

  1. AThe advanced CVA approach based on internal VaR models was removed, and banks must use the standardised (SA-CVA) or basic (BA-CVA) approachCorrect
  2. BBanks may choose any internal model for CVA capital without supervisory approval
  3. CCVA capital charges were eliminated for all derivative portfolios
  4. DCVA capital is calculated only for exposures to central counterparties

Explanation

The Basel III reforms removed the internal-model-based advanced CVA approach. Banks now use the basic approach (BA-CVA) or, with supervisory approval, the standardised approach (SA-CVA). CVA capital was not eliminated and is not restricted to CCP exposures.

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