Explanation:
The correct operational risk capital that the bank should report under the Standardized Measurement Approach (SMA) is EUR 150 million. This is determined by applying the Business Indicator (BI) of EUR 1,200 million to the appropriate BI Component formula from the table provided. Since the BI falls into the second bucket (EUR 1 billion to EUR 30 billion), the calculation is as follows:
The Internal Loss Multiplier is given as 1, so the Business Indicator Component (BIC) is multiplied by this multiplier to arrive at the final operational risk capital of EUR 150 million.
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A risk manager in the operations division of a bank has been assigned the task of determining the operational risk capital, adhering to the Standardized Measurement Approach (SMA) as stipulated by the Basel Committee in their March 2016 guidelines. The following data has been supplied by the treasury department as per the SMA requirements:
Business Indicator (Bl): EUR 1,200 million Internal Loss Multiplier: 1
To aid in this calculation, the manager also consults the Business Indicator buckets within the Business Component as detailed in the table below:
| Bucket | BI Range | BI Component |
|---|---|---|
| 1 | EUR 0 to EUR 1 billion | 0.12*BI |
| 2 | EUR 1 billion to EUR 30 billion | EUR 120 million + 0.15(BI - EUR 1 billion) |
| 3 | Higher than EUR 30 billion | 0.18(BI -EUR 30 billion) |
What is the appropriate operational risk capital that the bank must disclose under the SMA?
A
EUR120million
B
EUR150 million
C
EUR158million
D
EUR180million