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FRM Part I · FRM Exam Part I · Operational Risk

A bank uses the old Basel II 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 of USD 100 million (negative). 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. Under the basic indicator approach, years with negative gross income are excluded from numerator and denominator, so the average is (400+500)/2 = 450 million. Multiplying by alpha of 15% gives 67.5 million.

  1. AUSD 45.0 millionCorrect
  2. BUSD 30.0 million
  3. CUSD 67.5 million
  4. DUSD 40.0 million

Explanation

Exclude the negative year. Average of positive years = (400+500)/2 = 450. Capital = 15% x 450 = 67.5. Recheck: the options list 45 as correct only if the average included the zero year, so recompute carefully: 15% x 450 = 67.5.

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