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Answer: FRTB requires that the stressed ES measure be used in determining market risk capital, rather than the VaR and stressed VaR measures that were used in Basel I and Basel ll.5,respectively
The correct answer regarding the Fundamental Review of the Trading Book (FRTB) is D. The Basel committee has transitioned from the VaR (Value at Risk) and stressed VaR measures used in Basel I and Basel II.5 to the stressed Expected Shortfall (ES) measure in FRTB. This shift is part of the evolution of the regulatory framework to better capture market risk and ensure banks maintain adequate capital to cover potential losses. Option A is incorrect because FRTB actually allows for market risk to be calculated at the trading desk level, contrary to the statement in the option. Option B is also incorrect. The FRTB represents an effort by the Basel committee to reduce reliance on internal models and instead mandates that all banks calculate market risk capital using a standardized approach, even those previously approved to use internal models. Option C is not accurate as FRTB introduces five different liquidity horizons that are more closely aligned with the liquidity horizons of various risk factors, rather than the uniform 10-day horizons used in Basel I and Basel II.5. The changes to the Basel framework under FRTB aim to address regulatory arbitrage, improve risk sensitivity, and ensure a more consistent and robust approach to market risk measurement and management across the banking industry.
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A regulatory analyst at a large multinational bank is assessing the regulatory mandates prescribed by the Basel Committee's Fundamental Review of the Trading Book (FRTB) standards. The analyst's review focuses on the evolution of the FRTB from the Basel I and Basel II.5 frameworks and includes examining the guidelines for implementing these standards. Based on this context, which statement accurately reflects the FRTB requirements?
A
While Basel I and Basel ll.5 allowed market risk to be calculated at the trading desk level, FRTB requires that market risk be calculated on a firm-wide basis.
B
While Basel I and Basel l.5 emphasized the use of a standardized approach to calculating market risk, FRTB encourages each bank to develop and rely on an internal models approach.
C
FRTB standardizes the liquidity horizon used for all risk factors in the market risk capital calculation as 10 days, rather than the different horizons used in Basel I and Basel ll.5.
D
FRTB requires that the stressed ES measure be used in determining market risk capital, rather than the VaR and stressed VaR measures that were used in Basel I and Basel ll.5,respectively