Explanation:
Statement I is correct: Under the Advanced Measurement Approach (AMA) to operational risk, banks are required to construct their loss distributions using internal data, external data, scenario analysis, and business environment and internal control factors (BEICFs). Because operational risk profiles are highly institution-specific, the loss frequency distribution heavily relies on internal data and scenario analysis unique to that bank.
Statement II is incorrect: Historically, banks have done a significantly better job at recognizing, documenting, and modeling credit risk losses than operational losses. Collecting data on operational losses (e.g., fraud, system failures) is far more difficult and wasn't widely standardized until Basel II introduced operational risk capital requirements.
The question asks which statements are incorrect, making "II only" the right choice.
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Q.81 Austral-Asian Bank uses the advanced measurement approach to calculate the operational risk capital for regulatory purposes. Samuel Baker, a financial controller, working at the bank, analyzes the research reports on internal data and external data. He concludes the following from his analysis:
I. The loss frequency distribution must be specific to the bank and based on internal data and scenario analysis estimates
II. Historically, banks have done a much better job at documenting their operational losses than their credit risk losses
Which of these statements are incorrect?
A
I only
B
II only
C
I and II
D
None of the above
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