Financial Risk Manager Part 1
Get started today
Ultimate access to all questions.
In the scenario involving Bank Theta, a prominent financial institution engaged in retail banking, commercial banking, and payment and settlement services, a risk analyst has the responsibility of calculating the operational risk capital. This needs to be done using the advanced measurement approach (AMA) in accordance with Basel II guidelines. What key estimations must the analyst employ to determine the total operational risk capital required for Bank Theta under the AMA framework?
In the scenario involving Bank Theta, a prominent financial institution engaged in retail banking, commercial banking, and payment and settlement services, a risk analyst has the responsibility of calculating the operational risk capital. This needs to be done using the advanced measurement approach (AMA) in accordance with Basel II guidelines. What key estimations must the analyst employ to determine the total operational risk capital required for Bank Theta under the AMA framework?
Explanation:
B is correct. The AMA requires banks to consider every combination of 8 specified business lines and the 7 categories of operational risk identified by the Basel Committee. For each of the 56 combinations, banks have to estimate the 99.9 percent of the 1-year loss. These estimates are then aggregated to determine total operational risk capital, which is set equal to the 99.9 percentile of the loss distribution minus the expected operational loss, or the 99.9% VaR. Since Bank Theta has 3 of the 8 business lines, its operational risk capital would therefore be 1-year, 99.9% VaR based on loss distributions for each of the 21 (= 7 * 3) combinations of business line and operational risk type.