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

A supervisor reviews the 2017 Basel III changes to operational risk capital. Which description is correct?

The earlier operational risk approaches, including the advanced measurement approach, were replaced by one standardised approach. It combines a business indicator component, reflecting income-based size, with a loss component based on historical losses. It stays within Pillar 1 minimum capital.

  1. AMultiple operational risk approaches, including the advanced measurement approach, were replaced by a single standardised approach based on a business indicator and loss componentCorrect
  2. BThe advanced measurement approach was made mandatory for all banks
  3. COperational risk capital is based only on a bank's internal loss history with no income-based measure
  4. DOperational risk capital was removed from Pillar 1 and moved to Pillar 3

Explanation

The reforms replaced the basic indicator, standardised and advanced measurement approaches with a single non-model standardised approach combining a business indicator component and an internal loss multiplier. It remains a Pillar 1 requirement, and AMA was withdrawn, not mandated.

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