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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

A bank divests a business line that contributed materially to its operational risk losses. Under the Basel III standardised approach, how should the bank treat the associated historical losses in its loss component?

Exclusion of losses from a divested business is allowed only with supervisory approval, when those losses no longer reflect the bank's risk profile, and with disclosure. It is neither automatic nor prohibited, so the bank cannot simply drop the losses on divestiture.

  1. ASupervisors may permit exclusion of losses from divested activities only if they are no longer relevant to the bank's risk profile, subject to approval and disclosureCorrect
  2. BLosses must be excluded automatically upon divestiture
  3. CLosses must be retained for ten years with no exceptions
  4. DLosses must be halved for each year since the divestiture

Explanation

Basel III allows exclusion of losses from divested entities or activities only with supervisory approval, when the losses are no longer relevant to the risk profile, and the exclusion is disclosed. Automatic exclusion or no-exceptions retention are both inconsistent. Time-decay haircuts are not part of the framework.

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