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FRM Part II · FRM Exam Part II · Capital Regulation Before the Global Financial Crisis

Under the Basel II Standardised Approach for operational risk, how is a bank's total capital charge in a year determined?

The charge is the three-year average of each year's sum of beta-weighted gross income across business lines, with any negative annual total set to zero. Betas range from 12 to 18 percent. The 15 percent flat approach is the Basic Indicator Approach, and loss-distribution quantiles belong to the AMA.

  1. AAs the three-year average of the annual sums of each business line's beta multiplied by its gross income, with negative annual totals set to zeroCorrect
  2. BAs the highest single business line charge across the three years
  3. CAs 15% of the average of positive gross income over three years
  4. DAs the 99.9% quantile of a loss distribution built from internal data

Explanation

The Standardised Approach sums beta-weighted gross income across eight business lines each year (floored at zero for the year if negative), then averages over three years. Option C is the BIA and option D is the AMA.

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