Explanation:
According to Basel III guidelines for reporting operational losses, costs that are incurred to implement or upgrade systems, or to improve processes following an operational loss event, are considered investments and should not be included in the gross operational loss amount for regulatory capital purposes. The gross operational loss only captures the financial impact directly arising from the event itself. Therefore, Option D is correct.
Option A is incorrect because increasing the threshold would result in fewer losses being reported, potentially lowering (not increasing) the operational risk capital.
Option B is incorrect because while events should be reported, quantifying the exact impact immediately upon discovery is often not feasible or strictly required; investigations often take time to accurately determine financial losses.
Option C is incorrect because indirect effects (e.g., reputational damage leading to loss of customers) can sometimes be estimated in monetary terms, even if they are more challenging to quantify.
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A
An increase in the bank’s operational loss reporting threshold would cause an increase in its Basel operational risk capital.
B
Any operational risk event that directly affects the bank should be reported to the firmwide risk function and its impact should be quantified and recorded as soon as the event is discovered.
C
Operational risk events that indirectly affect the bank cannot be assessed in monetary terms because their consequences are non-financial.
D
Costs incurred to upgrade systems after an operational loss event should not be included in the gross operational loss amount reported for regulatory capital purposes.