medium · FRM Part 2 Operational Risk
A bank transitions from using the Internal Loss Multiplier (ILM) to a jurisdiction where ILM is fixed at 1.
If the bank had a poor loss history (LC > BIC), what is the impact on its capital?
- It must offset the change by raising its Pillar 2 supervisory add-on.
- There is no impact, since the BIC already reflects historical losses.
- Its capital increases to reflect the greater risk-sensitivity built into the BIC formula.
- It receives a capital windfall as its surcharge for poor history is removed.
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