Module: | MODULE B: RISK MANAGEMENT
Q304: Consider the following statements regarding the 1996 Amendment to the Basel I Capital Accord:
1. It was introduced to explicitly incorporate capital charges for Operational Risk alongside Credit Risk.
2. It mandated a standardized one-size-fits-all approach, strictly prohibiting banks from using their own internal risk models.
3. It allowed banks to use their proprietary Value at Risk models to calculate capital requirements for Market Risk, subject to regulatory approval.
Which of the statements given above is/are correct?
2. It mandated a standardized one-size-fits-all approach, strictly prohibiting banks from using their own internal risk models.
3. It allowed banks to use their proprietary Value at Risk models to calculate capital requirements for Market Risk, subject to regulatory approval.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is incorrect: The 1996 Amendment was introduced specifically to incorporate capital charges for Market Risk (arising from trading book exposures like equities, forex, and commodities). Operational Risk was not addressed until the Basel II Accord.
Statement 2 is incorrect: A groundbreaking feature of the 1996 Amendment was that it moved away from a strict one-size-fits-all approach.
It introduced the Internal Models Approach (IMA), allowing sophisticated banks to use their internal models rather than standardized formulas.
Statement 3 is correct: The amendment explicitly permitted banks to utilize their proprietary Value at Risk (VaR) models to compute their daily market risk exposure and consequent capital requirements, provided these models passed rigorous backtesting and received explicit regulatory approval.
Statement 2 is incorrect: A groundbreaking feature of the 1996 Amendment was that it moved away from a strict one-size-fits-all approach.
It introduced the Internal Models Approach (IMA), allowing sophisticated banks to use their internal models rather than standardized formulas.
Statement 3 is correct: The amendment explicitly permitted banks to utilize their proprietary Value at Risk (VaR) models to compute their daily market risk exposure and consequent capital requirements, provided these models passed rigorous backtesting and received explicit regulatory approval.