Explanation:
The correct answer is A.
The Fundamental Review of the Trading Book (FRTB) provides a solution to the problem of insufficient historical data for some market variables. According to the FRTB, the computation of stressed periods can be based on a subset of market variables. The results obtained from this subset can then be scaled up by the ratio of the expected shortfall for the latest 12 months using all variables to the expected shortfall for the latest 12 months using the subset of the market variables. This approach allows for a more comprehensive analysis of past stressed periods, even when complete historical data is not available for all market variables. It is a practical and efficient method to overcome the data shortage issue and ensure accurate risk assessment.
Choice B is incorrect. While it is true that supervisors should intervene at an early stage to prevent capital from falling below the necessary minimum levels, this does not directly address the issue of identifying past stressed periods due to a lack of historical data for some market variables as proposed by FRTB. This choice discusses more about the role of supervisors in maintaining capital adequacy rather than addressing the specific problem posed in the question.
Choice C is incorrect. Although it's important for a bank to have a process for assessing its overall capital adequacy relative to its strategy for capital level maintenance and risk profile, this doesn't solve the problem of identifying past stressed periods when there's insufficient historical data on certain market variables. This option focuses more on general risk management practices and not specifically on how FRTB proposes to handle situations with limited historical data.
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Q.2998 Billow Bank has sometimes been finding it difficult to search for past stressed periods using all market variables. This fact can be attributed to a shortage of historical data for some of the variables. How does the Fundamental Review of Trading Book (FRTB) deal with this challenge?
A
The FRTB can allow the stressed period computations to be based on a subset of market variables and the results scaled up by the ratio of the expected shortfall for the latest 12 months using all variables to the expected shortfall for the latest 12 months using the subset of the market variables.
B
An intervention at an early stage by supervisors should prevent capital from falling below the necessary minimum levels to support a particular bank’s risk characteristics, and a rapid remedial action should be required in case capital is not maintained or resorted.
C
The bank should possess a process for assessing the its overall capital adequacy relative its strategy for capital level maintenance and risk profile.
D
All the above.