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

Under the finalised Basel III operational risk framework, which statement about national supervisory discretion over the Internal Loss Multiplier is correct?

National supervisors may choose to set the ILM equal to 1 for all banks in their jurisdiction, which removes the effect of internal loss history on capital. Without that choice, larger banks must apply the ILM. The framework therefore does allow jurisdictional discretion, so rigid statements are incorrect.

  1. ASupervisors may set the ILM to 1 for all banks in their jurisdiction, so that internal losses do not affect capitalCorrect
  2. BSupervisors must always apply the ILM to every bank regardless of size
  3. CBanks in the lowest BIC bucket cannot use ILM, and supervisors cannot change that
  4. DSupervisors can never override ILM results because Basel prohibits any jurisdictional choice

Explanation

The standard gives national supervisors discretion to set ILM equal to 1 for all banks in their jurisdiction. If they do not, banks with a BIC above 1 billion euros must use the ILM. Banks in the lowest bucket (BIC up to 1 billion euros) already have ILM equal to 1.

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