medium · FRM Part 2 Operational Risk

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?

1. The ILM of 1.097 indicates the bank must now discontinue the SMA and revert to its own internal Advanced Measurement Approach model.
2. 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.
3. The bank's loss history is deemed 'clean' because the €600 million average annual loss is well below the 2% threshold relative to the total BI.
4. The ILM will be disregarded entirely because Basel III mandates a fixed ILM of exactly 1.0 for every bank placed into Bucket 3, regardless of loss history.

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