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Answer: The basic indicator approach sets risk capital equal to 15% of the bank's 3-year average annual gross income
**Basic Indicator Approach (BIA):** - Sets operational risk capital equal to **15% of the bank's 3-year average annual gross income** - Simplest approach, suitable for smaller banks **Standardized Approach (TSA):** - Similar to BIA but calculates capital separately for each business line - Uses **different beta factors** for different business lines (not the same percentage) - Beta factors range from 12% to 18% depending on the business line **Advanced Measurement Approach (AMA):** - Estimates the **99.9 percentile of the 1-year loss distribution** - Considers combinations of business lines and operational risk types - Most sophisticated approach, requires regulatory approval **Why other options are incorrect:** - A: This describes the Advanced Measurement Approach (AMA), not the Standardized Approach - B: This also describes the Advanced Measurement Approach (AMA) - D: The Standardized Approach uses different beta factors for different business lines, not the same percentage
Author: LeetQuiz Editorial Team
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Which of the following statements about operational risk capital approaches is correct?
A
The standardized approach estimates the 99.9 percentile of the 1-year loss for every combination of business lines and operational risk types
B
The standardized approach treats operational risk like credit risk and sets capital equal to the 99.9 percentile of the loss distribution
C
The basic indicator approach sets risk capital equal to 15% of the bank's 3-year average annual gross income
D
The standardized approach uses the same percentage for all business lines