Answer-first summary for fast verification
Answer: Regulators proposed an incremental default risk charge (IDRC) in 2005 that would be calculated with a 99.9% confidence level and a one-year time horizon for instruments in the trading book that were sensitive to default risk.
## Explanation Option C is false because: - The **Incremental Default Risk Charge (IDRC)** was actually proposed in **2009**, not 2005 - IDRC was introduced as part of Basel 2.5 reforms in response to the 2007-2008 financial crisis - The correct confidence level for IDRC is **99.9%** with a **one-year time horizon** for instruments sensitive to default risk in the trading book **Why the other options are true:** - **Option A**: Correct - Basel III IMA requires daily VaR calculation with 99% confidence level and 10-day holding period - **Option B**: Correct - The Basel Committee did recognize that most losses during the crisis came from credit rating changes, spread widening, and liquidity issues rather than actual defaults - **Option D**: Correct - The Comprehensive Risk Measure (CRM) was specifically designed to capture risks in correlation trading portfolios including asset-backed securities This question tests knowledge of the evolution of Basel market risk frameworks, particularly the post-crisis reforms introduced in Basel 2.5.
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Under Basel III, each of the following is true about the internal models approach (IMA) to market risk except which is false?
A
Value at risk (VaR) must be computed on a daily basis with a one-tailed confidence level of 99.0% and a minimum holding period of ten (10) days
B
In 2008, the Basel Committee recognized that most of the losses in the credit market turmoil of 2007 and 2008 were from changes in credit ratings, widening of credit spreads, and loss of liquidity, but as a result of defaults excluded.
C
Regulators proposed an incremental default risk charge (IDRC) in 2005 that would be calculated with a 99.9% confidence level and a one-year time horizon for instruments in the trading book that were sensitive to default risk.
D
The comprehensive risk measure (CRM) is designed to take account of risks in asset-backed securities.
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