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FRM Part I · FRM Exam Part I · Operational Risk

Under the old Basel Standardised Approach (TSA), a bank has three-year gross income by business line as follows for a given year: Retail banking USD 400 million (beta 12%) and Trading and sales USD 200 million (beta 18%). Ignoring negative-income offsets and averaging, assuming these figures are the same in each of the three years, what is the annual operational risk capital charge?

The capital charge is USD 84 million. Under the old Standardised Approach, each business line's gross income is multiplied by its own beta: 12% of USD 400 million is USD 48 million and 18% of USD 200 million is USD 36 million. Summing them gives USD 84 million.

  1. AUSD 84 millionCorrect
  2. BUSD 90 million
  3. CUSD 48 million
  4. DUSD 36 million

Explanation

Capital for each line = beta × gross income. Retail: 0.12 × 400 = 48. Trading: 0.18 × 200 = 36. Sum = 84. Option 48 and 36 each omit one business line. Using a flat 15% on 600 gives 90, which ignores the line-specific betas.

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