medium · FRM Part 2 Operational Risk
An operational risk manager is calculating the 99.9% annual aggregate loss quantile using the Standardized Measurement Approach (SMA).
Which structural element of the SMA serves as a risk-sensitive 'memory' of past large losses?
- The tail index ξ estimated from a GPD fit applied to the previous year's full internal aggregate loss tail.
- The Expected Loss deduction, which specifically accounts for high-frequency, low-severity operational loss events seen.
- The Advanced Measurement Approach capital charge, which regulators once required banks to add on top of the SMA base figure.
- The Internal Loss Multiplier (ILM), which is a function of the Loss Component and the Business Indicator Component.
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