Answer: Loss severity and loss frequency are often modeled with lognormal and Poisson distributions, respectively.

## Explanation **Correct Answer: B** Let's analyze each option: **Option A**: Incorrect - Economic capital covers the difference between the worst-case loss and the expected loss, not both the expected and worst-case losses. Expected losses are typically covered by provisions and reserves, while economic capital covers unexpected losses. **Option B**: Correct - This statement is accurate: - **Loss frequency** is typically modeled using a **Poisson distribution**, which is appropriate for counting the number of loss events over a given time period. - **Loss severity** is often modeled using a **lognormal distribution**, which is suitable for modeling positive-valued loss amounts that tend to be right-skewed. **Option C**: Incorrect - Operational loss data from vendors tends to be biased toward **large losses** (not small losses) because small losses are often not reported or recorded. These data are most useful for determining **relative loss severity**, not loss frequency. **Option D**: Incorrect - The standardized approach for operational risk capital calculation does **not** require banks to estimate unexpected losses. Instead, it uses predetermined beta factors applied to gross income across different business lines. **Key Points:** - Economic capital = Unexpected losses = Worst-case loss - Expected loss - Expected losses are covered by provisions - Standardized approach uses beta factors based on business lines - External loss data is biased toward large, publicly reported losses

Author: LeetQuiz Editorial Team