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Answer: The calculations will need to be broken down by business line.
C is correct. The basic indicator approach sets risk capital equal to 15% of the bank’s 3-year average annual gross income. The standardized approach is similar, except that separate calculations are carried out by business line and the percentage applied to gross income varies across business lines. A is incorrect. The advanced measurement approach, not the standardized approach, treats operational risk like credit risk and sets capital equal to the 99.9 percentile of the loss distribution minus the expected operational loss. B is incorrect. The advanced measurement approach, not the standardized approach, estimates the 99.9 percentile of the 1-year loss for every combination of business lines and the seven operational risk types identified by the Basel Committee. D is incorrect. The Business Indicator is used in the standardized measurement approach developed under revisions to Basel III, not the standardized approach.
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An emerging market bank has been using the Basic Indicator Approach (BIA) to calculate its operational risk capital. It now qualifies for and will switch to the Basel II Standardized Approach (TSA). Which of the following accurately describes a key change in how the bank will calculate its operational risk capital under this transition?
A
The calculations will need to be broken down by the operational risk types defined by the Basel Committee.
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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