medium · FRM Part 2 Operational Risk
A bank is calculating its Operational Risk capital using the Standardized Measurement Approach (SMA). The bank has a Business Indicator (BI) of 35 billion and its internal 10-year average annual losses are 800 million.
If the bank's internal losses increase significantly next year, which component of the SMA calculation will reflect this change, and how?
- The Loss Given Default (LGD), which will be statistically recalibrated for operational loss events.
- The Internal Loss Multiplier (ILM), which will increase as the Loss Component (LC) rises relative to the BIC.
- The Business Indicator Component (BIC), which will mechanically increase due to the higher reported loss expenses.
- The Probability of Default (PD), which will rise sharply due to the bank's growing operational risk fragility profile.
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