hard · Frm Part 2 Operational Risk
A bank is calculating its operational risk capital under the Standardized Measurement Approach (SMA). The Business Indicator (BI) is in 42 billion and the 10-year average annual loss is in 600 million.
If the Internal Loss Multiplier (ILM) is calculated to be 1.097, what does this imply about the bank's loss history relative to its size?
- The ILM of 1.097 indicates that the bank must switch back to the Advanced Measurement Approach (AMA) to use its own internal models.
- The bank's loss history is 'dirty' and adds approximately 10% to the capital charge compared to a bank of the same size with average losses.
- The bank's loss history is 'clean' because the average loss of in 600 million is less than 2% of the total BI.
- The ILM will be ignored because Basel III mandates an ILM of 1.0 for all banks in 'Bucket 3' to ensure global comparability.
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