Basel readings

[LeeBrittain]

Hi David,

If our interest (in Basel specifically) is solely for passing the exam, do you recommend reading the hundreds of pages of readings the FRM assigns or should your notes suffice? Does anyone know if past questions on the exam about BASEL have been more mathematical or conceptual in nature?

Edit: I see you've already answered my first question below in the forum, so I guess I'm more interested in the second question.

Thanks,
Lee

 

[Suzanne Evans]

Hi David,

If our interest (in Basel specifically) is solely for passing the exam, do you recommend reading the hundreds of pages of readings the FRM assigns or should your notes suffice? Does anyone know if past questions on the exam about BASEL have been more mathematical or conceptual in nature?

Edit: I see you've already answered my first question below in the forum, so I guess I'm more interested in the second question.

Thanks,
Lee

Hi Lee,

Do you need the readings? See here.
Is it sufficient to only utilize bionicturtle.com's contents? See here.

Should you have any additional questions or concerns, please do not hesitate to ask.

Thanks,
Suzanne

 

[David Harper CFA FRM]

Hi Lee,

(Thanks for searching the forum for help on the first part of your question, it is much appreciated!)

The Basel questions have historically tilted to conceptual/qualitative rather than quantitative. For further support, GARP continues to improve the consistency of their AIM verbs; our feedback has included numerous specific requests to employ the quantitative verbs (i.e., "calculate," "compute" and "derive") with intention. And, you'll see the 2012 Basel AIMs, are not only tighter this year, than in previous years, but they are generally conceptual (verbs = discuss, describe, define, explain). In this respect, the Basel AIMs are currently as reliable as they've ever been (in my opinion). This points to heavy concept, not math.

However, several of them can be tested with basic math. Historically, the exceptions have been included (off the top of my head, not necessarily comprehensive):

• Given an risk exposure and a credit rating, compute the credit risk charge under standardized approach e.g., credit charge against $10 million AAA corporate = $10 MM * 20% risk weight * 8% charge = $160,000 (historically common)
• Computing/scaling to a Basel IMA market risk VaR; i.e., given a 1-day (or x-day) 95.0% VaR, scale to a 10-day 99.0% IMA-style VaR
• I might expect them to query any of the simple math around the Basel III items, since these are timely. Less calculations and more definitions: net stable funding ratio; I do recall they have recently tested the MAX() function of stressed VaR, so knowledge of that formula.
• Otherwise, I would expect numbers to appear as applications of definitions; e.g., given some balance sheet items, retrieve the Tier 1 capital.
• Consistent with my other comments, I definitely would not get into a time trap on most of the esoteric Basel, but instead remain at the superficial (the AIMs, the AIMs!) and basic applications. A lot of the Basel document is depth into credit risk that will not see the exam. The additional documents (liquidity risk, market risk framework) are just as, if not more, important

I hope that helps, Thanks, David

 

[David Harper CFA FRM]

Lee,

I woke up this morning worried that I shortchanged, with respect to quantitative methods, the basic math employed for each of the three risk buckets. From the AIMs specifically note:

Describe and contrast the major elements of the three options available for the calculation of credit risk:

• Standardized Approach
• Foundation IRB Approach
• Advanced IRB Approach

Describe and contrast the major elements of the three options available for the calculation of operational risk:

• Basic Indicator Approach
• Standardized Approach
• Advanced Measurement Approach

Describe and contrast the major elements—including a description of the risks covered—of the two options available for the calculation of market risk:

• Standardized Measurement Method
• Internal Models Approach

Note GARP has left the door open to calculations with respect to any of these. Thanks,