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Answer: The calculations will need to be broken down by business line.
The bank's operational risk capital calculations will change by adopting the Basel II standardized approach, which requires separate calculations to be carried out by business line. This is in contrast to the basic indicator approach, where risk capital is calculated as a flat 15% of the bank's 3-year average annual gross income. Under the standardized approach, the percentage applied to gross income varies across different business lines, allowing for a more nuanced assessment of operational risk. This change enables the bank to better tailor its capital allocation to the specific operational risks inherent in each business line, reflecting a more granular and potentially more accurate representation of the bank's overall operational risk profile.
Author: LeetQuiz Editorial Team
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A bank situated in an emerging market has been using the basic indicator method to compute its operational risk capital. Having now met the necessary prerequisites, the bank is shifting to the Basel II standardized method. How will the calculations for the bank's operational risk capital change under the new method?
A
The calculations will be based on a percentile of a loss distribution rather than a percentage applied to gross income.
B
The calculations will need to be broken down by the operational risk types defined by the Basel Committee.
C
The calculations will need to be broken down by business line.
D
The calculations will now need to include a Business Indicator component.
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