Answer-first summary for fast verification
Answer: Any trading losses suffered by the bank will increase the business indicator component, despite decreasing gross income.
## Explanation **Option C is correct** because under the Standardized Measurement Approach (SMA), trading losses and operating expenses that reduce gross income are treated differently - they actually increase the business indicator component rather than decreasing it. **Option A is incorrect** because this describes the calculation methodology under the Advanced Measurement Approach (AMA), not the SMA. The SMA uses a different calculation method based on the business indicator and loss component. **Option B is incorrect** because there is no business indicator component under the AMA. The AMA uses internal models to calculate operational risk capital, while the SMA specifically introduces the business indicator component. **Option D is incorrect** because for an average bank, the loss component and business indicator component are designed to be equal under the SMA framework, not with the loss component being greater. The SMA represents a significant shift from previous approaches by combining a business indicator (proxy for operational risk exposure) with a loss component based on historical operational losses, creating a more standardized and comparable framework across banks.
Author: LeetQuiz .
Ultimate access to all questions.
An operational risk manager at a bank is preparing for the bank's adoption of the standardized measurement approach (SMA) for calculating operational risk capital according to Basel guidelines. The manager focuses on the formulation of the business indicator component and the loss component. Which of the following statements is correct regarding these two components of the SMA?
A
The loss component is calculated as the 99.9 percentile of the 1-year loss for each business unit and risk type.
B
The business indicator component is calculated in the same manner under the SMA as it is under the advanced measurement approach.
C
Any trading losses suffered by the bank will increase the business indicator component, despite decreasing gross income.
D
The SMA is structured in such a way that for an average bank, the loss component is greater than the business indicator component.
No comments yet.