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Answer: Under the advanced/internal approaches, all three risk categories (credit, market, and operational risk) employ value at risk (VaR) concepts.
## Explanation Let's analyze each option: **Option A: TRUE** - Under Basel II, banks could indeed reduce their capital charge (subject to a limit) by demonstrating diversification benefits due to imperfect correlation between credit, operational, and market risk buckets. **Option B: TRUE** - Pillar Two (Supervisory Review Process) explicitly allows national supervisors to require additional capital beyond Pillar One minimums if they deem it necessary based on their assessment of a bank's risk profile. **Option C: FALSE** - This statement is incorrect because: - Market risk uses VaR concepts - Operational risk uses Loss Distribution Approach (LDA) and other methods, not VaR - Credit risk uses Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD) approaches, not VaR **Option D: TRUE** - Basel II did not include an explicit capital charge for liquidity risk. Liquidity risk was addressed more comprehensively in Basel III. Therefore, option C is the false statement as it incorrectly claims that all three risk categories under advanced approaches employ VaR concepts.
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In regard to Basel II minimum capital requirements, which of the following is false?
A
Banks can reduce their capital charge, subject to a limit, if they can demonstrate diversification benefit due to imperfect correlation between the major risk buckets: credit, operational and market risk.
B
Pillar Two explicitly encourages national authorities (supervisors) to supplement Pillar One with additional capital requirements at their discretion if they deem appropriate.
C
Under the advanced/internal approaches, all three risk categories (credit, market, and operational risk) employ value at risk (VaR) concepts.
D
Basel II had no explicit charge for liquidity risk.
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