CMA Final · Risk Management in Banking and Insurance · Operational Risk and Off-Balance Sheet Risk
A bank's gross income for the last three years is Rs 200 crore, Rs 240 crore and Rs 280 crore, all positive. Under the Basic Indicator Approach with alpha of 15%, the operational risk capital charge is:
The capital charge is Rs 36 crore. Under the Basic Indicator Approach, take the average of positive annual gross income over three years, which is Rs 240 crore, and multiply by alpha of 15%. Using only the latest year would give Rs 42 crore, which is incorrect.
- ARs 30 crore
- BRs 36 croreCorrect
- CRs 42 crore
- DRs 108 crore
Explanation
Average gross income = (200+240+280)/3 = Rs 240 crore. Capital charge = 15% x 240 = Rs 36 crore. Rs 42 crore uses only the latest year; Rs 108 crore wrongly sums the three years' charges ignoring averaging.
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