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FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience

Under the Basel III standardised approach for operational risk capital (effective framework), which pair of components is multiplied to obtain the operational risk capital requirement?

Capital equals the Business Indicator Component multiplied by the Internal Loss Multiplier. The BIC reflects bank size through marginal coefficients applied to the Business Indicator, while the ILM scales capital up or down according to the bank's own historical operational losses.

  1. ABusiness Indicator Component and Internal Loss MultiplierCorrect
  2. BBusiness Indicator and the bank's 99.9% loss quantile
  3. CGross income and a fixed 15% alpha factor
  4. DAverage annual loss and the supervisory add-on

Explanation

The Basel III standardised approach sets operational risk capital as the Business Indicator Component (BIC) multiplied by the Internal Loss Multiplier (ILM). The BIC is based on a bank's size via the Business Indicator, and the ILM adjusts for the bank's historical loss experience. The 15% alpha-of-gross-income method belongs to the old Basic Indicator Approach.

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