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FRM Part I · FRM Exam Part I · Operational Risk

A bank under the Basic Indicator Approach reports gross income of USD 800 million, USD 1,000 million and USD 1,200 million over three years. Using alpha of 15%, the bank wants to know the capital charge. A risk analyst alternatively proposes using the most recent year only. By how much would the most-recent-year figure exceed the correct charge?

The most-recent-year approach would exceed the correct charge by USD 30 million. The Basic Indicator Approach uses the three-year average gross income of 1,000 million, giving 150 million at 15%. Using only the latest year, 1,200 million, gives 180 million, a difference of 30 million.

  1. AUSD 30 millionCorrect
  2. BUSD 18 million
  3. CUSD 150 million
  4. DUSD 0 million

Explanation

Correct BIA uses the three-year average: 1,000 x 15% = 150 million. Most recent year: 1,200 x 15% = 180 million. Difference = 30 million. The 18 million figure arises from a wrong 15% of 120 mismatch, not any valid calculation.

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