Explanation:
By choosing the Standardized Approach under Basel II for CAR calculation, the primary action the bank needs to take is to assign predefined risk weights to its assets as set by regulatory authorities. In the Standardized Approach, risk weights are prescribed by supervisory bodies and are applied uniformly across all types of assets, such as corporate loans, mortgages, and government securities. This approach does not require the development of internal risk models or the calculation of PD for each asset, as the focus is on applying regulatory standards to assess the risk weight of each asset class.
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Q.5964 A regional bank has recently chosen to adopt the Standardized Approach under the Basel II framework for calculating its Capital Adequacy Ratio (CAR). This decision was made to streamline the bank’s risk management processes. Considering this approach, what is the primary action the bank needs to take in line with its decision to ensure accurate CAR calculation?
A
Develop sophisticated internal risk assessment models.
B
Obtain regulatory approval for its internal risk models.
C
Assign predefined risk weights to its assets as set by regulatory authorities.
D
Calculate the Probability of Default (PD) for each type of asset.
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