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FRM Part II · FRM Exam Part II · Capital Regulation Before the Global Financial Crisis

Which statement best describes how Basel II changed Pillar 1 credit risk capital relative to Basel I?

Basel II made credit risk weights more risk-sensitive by permitting external ratings in the standardised approach or internal ratings in the foundation and advanced IRB approaches. It kept the 8 percent minimum ratio and the market risk charge, unlike the other statements suggest.

  1. AIt replaced risk weights with a single flat 8% charge on all assets
  2. BIt made risk weights more risk-sensitive by allowing external ratings under the standardised approach or internal ratings under the IRB approachesCorrect
  3. CIt removed the 8% minimum capital ratio
  4. DIt eliminated capital charges for market risk

Explanation

Basel II improved risk sensitivity: the standardised approach uses external credit assessments and the IRB approaches use banks' internal estimates. The 8% minimum remained and market risk charges were retained.

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