The calculation of the net stable funding ratio (NSFR) and the liquidity coverage ratio (LCR) were not changes implemented through Basel 2.5. These are liquidity measures that were introduced later, under Basel III. Basel III was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–2008. It is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage. The NSFR is designed to ensure that long-term assets are funded with at least a minimum amount of stable liabilities in order to mitigate the risk of future funding stress. The LCR is a requirement that banks hold an amount of high-quality liquid assets that's enough to cover its total net cash outflows over 30 days. Both of these measures aim to improve the banking sector's ability to absorb shocks arising from financial and economic stress, thus reducing the risk of spill over from the financial sector to the real economy.

Choice A is incorrect. Basel 2.5 did introduce the calculation of a stressed VaR (Value at Risk). This was done to ensure that banks have enough capital to cover extreme losses during periods of significant financial stress.

Choice B is incorrect. The implementation of a new incremental risk charge (IRC) was indeed part of the changes brought about by Basel 2.5. The IRC was designed to capture the default and migration risks for unsecuritized credit products.

Choice C is incorrect. Basel 2.5 also introduced a comprehensive risk measure (CRM) for instruments sensitive to correlations between default risks of various instruments, in order to better manage and mitigate systemic risk.

Things to Remember

• Basel II.5 was an update to the Basel II framework, aimed at addressing some of the shortcomings and weaknesses identified in the original Basel II regulations.
• Stressed VaR is a risk measure that calculates the potential losses a portfolio could face during periods of financial stress.
• Incremental Risk Charge (IRC) is a capital charge that covers the risk of default and migration for unsecuritized credit products.
• Comprehensive Risk Measure (CRM) helps in managing and mitigating systemic risk by considering correlations between default risks of different instruments.
• Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR) are liquidity measures introduced under Basel III to strengthen bank liquidity and decrease leverage.