Capital Regulation Before the Global Financial Crisis (FRM Part 2 2023 – Book 3 – Chapter 19)

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After completing this reading, you should be able to:
- Explain the motivations for introducing the Basel regulations, including key risk exposures addressed, and explain the reasons for revisions to Basel regulations over time.
- Explain the calculation of risk-weighted assets and the capital requirement per the original Basel I guidelines.
- Describe measures introduced in the 1995 and 1996 amendments, including guidelines for netting of credit exposures and methods to calculate market risk capital for assets in the trading book.
- Describe changes to the Basel regulations made as part of Basel II, including the three pillars.
- Compare the standardized IRB approach, the Foundation Internal Ratings-Based (IRB) approach, and the advanced IRB approach for the calculation of credit risk capital under Basel II.
- Compare the basic indicator approach, the standardized approach, and the Advanced Measurement Approach for the calculation of operational risk capital under Basel II.
- Summarize elements of the Solvency II capital framework for insurance companies.