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Answer: 1-year VaR based on loss distributions for each of the 21 combinations of business lines and each of the Basel operational risk types
## Explanation **B is correct.** The Advanced Measurement Approach (AMA) under Basel II requires banks to: - Consider every combination of the 8 specified business lines and 7 categories of operational risk identified by the Basel Committee - For each combination, estimate the 99.9 percentile of the 1-year loss distribution (99.9% VaR) - These estimates are then aggregated to determine total operational risk capital - The capital requirement equals the 99.9 percentile of the loss distribution minus the expected operational loss Since Bank Theta has 3 of the 8 business lines, the analyst would need to calculate 1-year, 99.9% VaR based on loss distributions for each of the 21 combinations (7 risk types × 3 business lines). **A is incorrect** - This does not correspond with any Basel Committee approach for operational risk capital calculation. **C is incorrect** - VaR, not Expected Shortfall (ES), is used for each of the combinations under the AMA. **D is incorrect** - This data would be used with specific percentages for each business line under the Basel II standardized approach, not the AMA.
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Bank Theta is a large bank with three business lines: retail banking, commercial banking, and payment and settlement. A risk analyst at the bank is calculating the bank's operational risk capital using the advanced measurement approach (AMA) introduced under Basel II. Which of the following sets of estimates would the analyst need to make in order to calculate Bank Theta's total operational risk capital requirement under the AMA?
A
1-year ES based on loss distributions for each of the three business lines
B
1-year VaR based on loss distributions for each of the 21 combinations of business lines and each of the Basel operational risk types
C
1-year ES based on loss distributions for each of the 21 combinations of business lines and each of the Basel operational risk types
D
3-year average annual gross income for each of the three business lines
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