Financial Risk Manager Part 2

Get started today

Ultimate access to all questions.

Explanation:

Explanation

Option C is false because:

Basel III operational risk capital requirements are calibrated at the 99.9% confidence level over a one-year horizon, not 99.99%
The 99.9% confidence level is standard across all operational risk approaches (BIA, SA, AMA)
There is no provision in the Standardized Approach that requires business units to use a higher confidence level (99.99%) if they fail to provision expected operational losses

Why the other options are correct:

Option A: Correctly describes the difference between BIA (single gross income proxy) and SA (business line-specific beta factors applied to gross income)
Option B: Correctly explains that beta factors represent industry-wide relationships between operational risk losses and gross income for each business line
Option D: Correctly states that national supervisors can authorize the Alternative Standardized Approach (ASA), which uses loans and advances instead of gross income for retail and commercial banking business lines

The Standardized Approach under Basel III maintains the 99.9% confidence level standard across all business lines, regardless of provisioning practices.

Explanation:

Explanation

Option C is false because:

Basel III operational risk capital requirements are calibrated at the 99.9% confidence level over a one-year horizon, not 99.99%
The 99.9% confidence level is standard across all operational risk approaches (BIA, SA, AMA)
There is no provision in the Standardized Approach that requires business units to use a higher confidence level (99.99%) if they fail to provision expected operational losses

Why the other options are correct:

Option A: Correctly describes the difference between BIA (single gross income proxy) and SA (business line-specific beta factors applied to gross income)
Option B: Correctly explains that beta factors represent industry-wide relationships between operational risk losses and gross income for each business line
Option D: Correctly states that national supervisors can authorize the Alternative Standardized Approach (ASA), which uses loans and advances instead of gross income for retail and commercial banking business lines

The Standardized Approach under Basel III maintains the 99.9% confidence level standard across all business lines, regardless of provisioning practices.

Comments (0)

No comments yet.

Each of the following is true about the Standardized Approach (SA) to operational risk under Basel III except which is false?

Exam-Like

Community

LLeetQuiz

Whereas the Basic Indicator Approach (BIA) uses Gross Income for the whole institution as a proxy for the scale of business operations, the standardized approach (SA) calculates the capital charge for each business line by multiplying its gross income by a factor (denoted beta) assigned to that business line.

6.3%

The beta factor in the Standardized Approach (SA) serves as a proxy for the industrywide relationship between the operational risk loss experience for a given business line and the aggregate level of gross income for that business line.

12.5%

Under the standardized approach (SA), business units that fail to provision expected operational losses must calibrate their risk charge based on the unexpected loss at 99.99% confidence level (i.e., rather than 99.9%) over a one-year horizon.

56.3%