FRM Part I · FRM Exam Part I · Operational Risk
A bank under the old Basic Indicator Approach has annual gross income of USD 800 million, USD 900 million, and USD 1,000 million (the most recent three years) and applies alpha of 15%. What is the operational risk capital charge?
The capital charge is USD 135 million. The Basic Indicator Approach takes the three-year average of gross income, which is USD 900 million, and multiplies it by alpha of 15%. Using only the latest year's income of USD 1,000 million would wrongly give USD 150 million.
- AUSD 120 million
- BUSD 135 millionCorrect
- CUSD 150 million
- DUSD 45 million
Explanation
The BIA charge is 15% of the average positive annual gross income over three years. Average = (800+900+1000)/3 = 900. Capital = 0.15 × 900 = 135. Using only the latest year gives 150, which is a wrong base; using the earliest gives 120.
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