Explanation:
Under the Basel II Standardized Approach, operational risk capital is calculated by summing the capital charges (Gross Income × Beta) across all business lines each year. If the aggregate sum for a given year is negative, it is counted as zero. The total is then averaged strictly over 3 years.
Total sum of positive years = 0 + 7.03241 + 1.50416 = 8.53657 million. Capital = 8.53657 / 3 = 2.8455 million.
This closely matches Option A (USD 2.845 million).
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Q.40 Assume that the following information on revenue has been provided by Jacque’s & Josh Bank (in USD million). From the data, how much operational risk capital should be held by the bank under Basel II by applying the Standardized Approach? The multipliers for corporate finance and retail banking are 17.99% and 12.11%, respectively.
| Year one | Year two | Year three | |
|---|---|---|---|
| Corporate finance | 11.9 | 19.3 | 29.7 |
| Retail banking | –26.2 | 29.4 | –31.7 |
A
USD 2.845 million
B
USD 4.268 million
C
USD 3.527 million
D
USD 4.119 million
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