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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

A bank's three-year average Business Indicator is €5 billion. Its average annual operational risk losses over the previous ten years are €48 million. The marginal BIC coefficients are 12% for BI up to €1bn, 15% for BI from €1bn to €30bn, and 18% above €30bn. What are the bank's operational risk-weighted assets under the SMA?

RWA is €9.0 billion. The Business Indicator Component is 12% of €1bn plus 15% of €4bn, giving €720 million. The loss component is 15 times €48 million, also €720 million, so the multiplier is 1. Capital of €720 million times 12.5 gives €9.0 billion.

  1. A€9.0 billionCorrect
  2. B€7.5 billion
  3. C€720 million
  4. D€9.375 billion

Explanation

BIC = 12% × 1,000 + 15% × 4,000 = 120 + 600 = €720m. Loss component = 15 × 48 = €720m, which equals BIC, so ILM = ln(e − 1 + 1) = 1. Capital = €720m and RWA = 12.5 × 720 = €9,000m. Applying a flat 12% gives 7.5bn, which ignores the higher marginal rate on the excess over €1bn.

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