One of the flaws is the inability of the models to capture the market risk in their trading book positions, particularly under stressed conditions. This is sought to be corrected by requiring that the capital calculations be made on parameters calibrated to stressed conditions. 9.
The last decade witnessed a quantum jump in the derivatives activities of banks leading to a phenomenal rise in counterparty credit risk. One of the shortcomings of the prevailing Basel II framework is that it does not fully capture the unexpected rise in counterparty exposures under stressed conditions.