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FRM Part I · FRM Exam Part I · Operational Risk

Under the Basel standardised approach for operational risk capital (the Basel III/IV framework), which two inputs are multiplied together to give a bank's operational risk capital requirement?

Operational risk capital under the revised Basel standardised approach equals the business indicator component multiplied by the internal loss multiplier. The BIC scales with the bank's size, and the ILM adjusts it for the bank's own loss history. Gross income times alpha is the older Basic Indicator Approach.

  1. ABusiness indicator component and internal loss multiplierCorrect
  2. BGross income and a fixed 15% alpha factor
  3. CValue at risk at 99.9% and a scaling factor of three
  4. DAverage annual loss and the number of business lines

Explanation

The revised standardised approach computes capital as the Business Indicator Component (BIC), derived from the bank's business indicator and marginal coefficients, multiplied by the Internal Loss Multiplier (ILM), which reflects the bank's historical losses. Gross income times alpha belongs to the older Basic Indicator Approach, so option B is wrong.

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