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FRM Part II · FRM Exam Part II · Fundamental Review of the Trading Book

Which of the following changes introduced under Basel 2.5 was most directly motivated by the observation that trading book losses in the crisis came largely from credit-sensitive positions that were not captured by 10-day 99% VaR?

The incremental risk charge was introduced in Basel 2.5 to capture default and credit migration risk in unsecuritized credit positions over a longer horizon, which 10-day VaR failed to capture during the crisis. The other options describe changes that were not made in Basel 2.5.

  1. ARemoval of the multiplication factor on VaR
  2. BReplacement of VaR with a standardized approach for all banks
  3. CIntroduction of the incremental risk charge for unsecuritized credit positionsCorrect
  4. DElimination of the distinction between trading and banking books

Explanation

The incremental risk charge captures default and migration risk of unsecuritized credit products over a one-year horizon at 99.9%, which VaR missed. The other options were not Basel 2.5 changes; the standardized approach and book boundary changes came with FRTB.

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