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Answer: Both I and II
## Explanation Under the Basel II framework, the **supervisory review process** (Pillar 2) requires supervisors to: - **Review internal control systems** (Statement I): This is a core component of Pillar 2, where supervisors assess whether banks have adequate internal controls, risk management processes, and capital allocation methodologies. - **Check compliance with transparency requirements** (Statement II): While Pillar 3 specifically addresses market discipline through disclosure requirements, supervisors under Pillar 2 must ensure that banks comply with these transparency requirements as part of their overall supervisory oversight. Both statements represent legitimate supervisory concerns under the Basel II framework's Pillar 2 (Supervisory Review Process). The foundation IRB approach for credit risk and standardized approach for operational risk are both subject to supervisory review to ensure proper implementation and compliance with regulatory standards. **Therefore, both I and II should be addressed as part of Smith's supervisory review process.**
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John Smith is a bank supervisor responsible for the oversight of Everbright Group, a large banking conglomerate. Everbright Group now determines its credit risk profile according to the foundation IRB approach and assesses operational risk according to the standardized approach as described in the Basel II Capital Accord. Which of the following are specific issues that should be addressed as part of Smith's supervisory review process of Everbright Group?
I. Review the bank's internal control systems. II. Check compliance with transparency requirements as described in Pillar 3 of Basel II Accord.
A
I only
B
II only
C
Both I and II
D
Neither I nor II
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