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FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience

A bank has a Business Indicator (BI) of EUR 20 billion. Under the Basel III standardised approach, BI bucket 1 (up to EUR 1 billion) has a marginal coefficient of 12%, bucket 2 (EUR 1 billion to EUR 30 billion) has 15%, and bucket 3 (above EUR 30 billion) has 18%. What is the Business Indicator Component?

The BIC is EUR 2.97 billion. The first EUR 1 billion attracts 12%, giving 0.12 billion, and the remaining EUR 19 billion attracts 15%, giving 2.85 billion. Marginal coefficients apply bucket by bucket, not to the entire Business Indicator.

  1. AEUR 2.40 billion
  2. BEUR 3.00 billion
  3. CEUR 2.97 billionCorrect
  4. DEUR 3.12 billion

Explanation

Marginal coefficients apply only to the slice in each bucket: 12% x 1 = 0.12; 15% x 19 = 2.85; total 2.97 billion. Applying 15% to the whole BI gives 3.00 billion, which ignores the lower marginal rate on the first bucket. Applying 12% to the whole BI gives 2.40 billion.

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