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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

Which of the following changes is part of the Basel III finalisation package regarding the use of internal models for credit risk?

The package removes advanced IRB for exposures to banks and large corporates and adds floors on PD, LGD and EAD inputs where IRB is retained. This limits model discretion and reduces unwarranted RWA variability, rather than abolishing IRB entirely.

  1. AAdvanced IRB is mandated for all exposures to large corporates
  2. BAdvanced IRB is removed for exposures to banks and large corporates, and input floors are introduced for other IRB exposuresCorrect
  3. CIRB approaches are abolished for retail exposures only
  4. DInternal models for credit risk are permitted without any input floors

Explanation

The reforms removed the use of advanced IRB for exposures to banks and financial institutions and for large corporates (those in groups with consolidated revenues above EUR 500 million), and introduced input floors for PD, LGD and EAD where IRB remains. The other options contradict this.

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