The Basel I framework, which was introduced in 1988, was primarily focused on credit risk. However, in 1996, the Basel Committee on Banking Supervision amended the Basel I framework to include market risk. The amendment provided two methodologies for measuring market risk: a standardized approach and an internal model-based approach. The standardized approach is a method that uses pre-determined risk weights to calculate the capital requirement for each type of market risk. This approach is simpler and less resource-intensive than the internal model-based approach, making it suitable for smaller banks or banks with less complex trading activities. The standardized approach methods are therefore correctly identified as a method of measuring market risk under the Basel I framework.

Choice A is incorrect. The Current Exposure Method (CEM) is a measure of counterparty credit risk in over-the-counter derivatives, not a method for measuring market risk under the Basel I framework.

Choice B is incorrect. The Original Exposure Method refers to the original amount of exposure at the time of transaction and it does not pertain to market risk measurement under Basel I.

Choice D is incorrect. The foundations of internal ratings-based approach are part of Basel II and III frameworks, which focus on credit risk, not market risk measurement under Basel I.

Things to Remember

• Basel I framework primarily focused on credit risk before the amendment in 1996 to include market risk.
• Market risk refers to the risk of losses in on and off-balance sheet positions arising from movements in market prices.
• Standardized approach in Basel I uses pre-determined risk weights to calculate capital requirements for market risk.
• Internal model-based approach in Basel I allows banks to use their own risk models to calculate capital requirements for market risk.