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

Why did the Basel Committee revise the CVA framework in the finalised post-crisis reforms, relative to the Basel II.5/Basel III 2010 framework?

The Committee revised the CVA framework because the old one ignored variability from the exposure component, gave limited hedge recognition, and was not aligned with accounting CVA practice or the revised market risk framework. It did not scrap the charge or permit unrestricted internal models.

  1. ATo remove the capital charge for CVA because it overlaps with credit risk
  2. BTo address shortcomings including that the earlier framework did not capture exposure-driven variability in CVA, did not recognise eligible hedges of exposure components, and was not aligned with accounting CVA and market risk frameworksCorrect
  3. CTo allow banks to use any internal model for CVA subject to a floor of zero
  4. DTo apply a single risk weight to all counterparties regardless of rating

Explanation

The review found the earlier framework omitted exposure component variability, limited hedge recognition, and was misaligned with accounting CVA and the market risk framework (FRTB). Removing the charge, free internal models, or one flat risk weight are not features of the revision.

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