Skip to content

FRM Part I · FRM Exam Part I · Operational Risk

A bank uses the Basic Indicator Approach with alpha of 15%. Its annual gross income over the last three years was USD 400 million, USD 500 million and a loss-affected figure of negative USD 100 million. Under the rule that negative or zero gross income years are excluded from both numerator and denominator, what is the operational risk capital charge?

The capital charge is USD 67.5 million. Years with negative gross income are excluded, so the average uses only the two positive years: (400 + 500) / 2 = 450 million. Multiplying by alpha of 15% gives 67.5 million. Dividing by three would incorrectly understate the charge.

  1. AUSD 67.5 millionCorrect
  2. BUSD 45.0 million
  3. CUSD 60.0 million
  4. DUSD 75.0 million

Explanation

Exclude the negative year. Average of positive years = (400 + 500) / 2 = 450. Capital = 15% x 450 = 67.5 million. Dividing the sum of positive years by three gives 300 and 45 million, which wrongly keeps the excluded year in the denominator. Including the negative figure gives 800/3 x 15% = 40.

Did you get it right without looking?

One question tells you little. A timed set on Operational Risk shows your real accuracy, how long you take and where you lose marks.

Practise Operational RiskFree diagnostic mock

More Operational Risk questions