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Explanation:
Option B is the EXCEPTION because one of the primary benefits and overarching goals of the economic capital framework is precisely that it provides a common metric (capital) allowing institutions to aggregate risk across major risk types (credit, market, and operational risk). The other options describe actual challenges or caveats of standard bottom-up credit risk quantification models: treating credit as illiquid (A), using a limited one-year horizon to simplify modeling (C), and dealing with siloed departments for different risk types without seamlessly capturing inter-risk correlation natively in the single bottom-up approach (D).
507.3. Schroeck illustrates the "bottom-up" approach to the quantification of economic capital for credit risk. But he cautions, "Despite the beauty and simplicity of the bottom-up (total) risk measurement approach just described, there are a number of caveats that need to be addressed." According to Schroeck, each of the following is a problem ("challenge") with the quantification of credit risk EXCEPT, which is not?
A
This approach assumes that credits are illiquid assets
B
This approach does not give us a way to aggregate economic capital across the major risk types: credit, market, and operational risk
C
In practice, to avoid undue complexity, these internal credit risk models tend to use only a one-year estimation horizon rather than multi-period horizon
D
While this approach considers default correlation with the same credit risk type, it assumes market and operational risk components are separated and are measured, and managed in different departments within the bank
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