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FRM Part II · FRM Exam Part II · High-level Summary of Basel III Reforms

A bank's BIC is EUR 420 million. Its average annual operational losses over ten years are EUR 63 million. The ILM is ln(exp(1) - 1 + (LC/BIC)^0.8), where LC is 15 times average annual losses. Which is closest to the ILM and resulting capital? (ln(exp(1)-1) = 0.5413; (2.25)^0.8 = 1.912; ln(1.718+1.912)=1.289)

The ILM is about 1.29 and capital about EUR 541 million. Loss component is 15 times EUR 63 million, or 945 million, which is 2.25 times BIC. The formula gives ln(1.718 plus 1.912), about 1.289, and multiplying by BIC of 420 million gives roughly 541 million.

  1. AILM 1.29; capital EUR 541 millionCorrect
  2. BILM 0.54; capital EUR 227 million
  3. CILM 1.00; capital EUR 420 million
  4. DILM 1.91; capital EUR 803 million

Explanation

LC = 15 x 63 = 945 million; LC/BIC = 2.25. Raised to 0.8 gives 1.912. ILM = ln(1.718 + 1.912) = ln(3.630) = 1.289. Capital = 420 x 1.289 = about 541 million. Option 1.91 forgets the logarithm.

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