Financial Risk Manager Part 2

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Explanation:

The Fundamental Review of the Trading Book (FRTB) replaces the Value-at-Risk (VaR) and stressed VaR measures previously used in Basel II and II.5 with a single Expected Shortfall (ES) measure, calibrated to a period of significant financial stress (97.5% confidence level).

Option A is incorrect: FRTB introduces a more granular desk-level approval process for internal models, whereas previous frameworks were generally applied more broadly at the firm-wide level.
Option B is incorrect: FRTB actually sets higher hurdles for utilizing Internal Models (IMA) and emphasizes a credible, risk-sensitive Standardized Approach (SA) that acts as a fallback and a floor.
Option C is incorrect: Instead of standardizing all liquidity horizons to 10 days, FRTB introduces varying liquidity horizons based on the risk factor categories (e.g., 10, 20, 60, 120, and 250 days) to reflect differing liquidity profiles under stress.
Option D is correct: Stressed ES is the required core metric for calculating market risk capital under FRTB.

Explanation:

Option A is incorrect: FRTB introduces a more granular desk-level approval process for internal models, whereas previous frameworks were generally applied more broadly at the firm-wide level.
Option B is incorrect: FRTB actually sets higher hurdles for utilizing Internal Models (IMA) and emphasizes a credible, risk-sensitive Standardized Approach (SA) that acts as a fallback and a floor.
Option C is incorrect: Instead of standardizing all liquidity horizons to 10 days, FRTB introduces varying liquidity horizons based on the risk factor categories (e.g., 10, 20, 60, 120, and 250 days) to reflect differing liquidity profiles under stress.
Option D is correct: Stressed ES is the required core metric for calculating market risk capital under FRTB.

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Question A regulatory analyst at a large multinational bank is examining regulatory requirements the bank must comply with under the Basel Committee’s FRTB guidelines. The analyst explores how the FRTB guidelines evolved from the Basel I and Basel II.5 frameworks as well as the instructions for applying the guidelines. Which of the following is correct regarding the FRTB?

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UAnonymous

Last updated: July 5, 2026 at 07:29

While Basel I and Basel II.5 allowed market risk to be calculated at the trading desk level, FRTB requires that market risk be calculated on a firm-wide basis.

While Basel I and Basel II.5 emphasized the use of a standardized approach to calculating market risk, FRTB encourages each bank to develop and rely on an internal models approach.

FRTB standardizes the liquidity horizon used for all risk factors in the market risk capital calculation as 10 days, rather than the different horizons used in Basel I and Basel II.5.

FRTB requires that the stressed ES measure be used in determining market risk capital, rather than the VaR and stressed VaR measures that were used in Basel I and Basel II.5, respectively.