Learning Objectives: Describe the different categories of operational risk and explain how each type of risk can arise. Compare the basic indicator approach, the standardized approach, and the advanced measurement approach for calculating operational risk regulatory capital. Describe the standardized measurement approach and explain the reasons for its introduction by the Basel committee.
Questions:
24.7.1. Which of the following scenarios BEST illustrates the operational risk category of "Clients, products, and business practices"?
a. A bank's trading system experiences a software glitch, which delays the execution of client orders and results in financial losses.
b. A bank employee intentionally misreports trading positions to conceal unauthorized trades, leading to a significant loss when the trades are discovered.
c. A bank fails to properly implement anti-money laundering controls, allowing criminals to use the bank's services to launder funds from illegal activities.
d. A natural disaster damages a bank's headquarters, forcing a temporary closure of the building and disrupting business operations.
24.7.2. Which of the following statements BEST compares the Basic Indicator Approach (BIA), the Standardized Approach (SA), and the Advanced Measurement Approach (AMA) for calculating operational risk regulatory capital under Basel II?
a. The BIA and SA use a fixed percentage of gross income, while the AMA requires banks to estimate the 99.9th percentile of the loss distribution minus the expected operational loss.
b. The BIA applies a single percentage to gross income, the SA applies varying percentages based on business lines, and the AMA uses a combination of internal and external loss data.
c. The BIA and SA require banks to consider every combination of business lines and risk types, while the AMA allows banks to use their own internal models.
d. The BIA, SA, and AMA all require banks to estimate the 99.9th percentile of the one-year loss for each combination of business lines and risk types.
24.7.3. In 2016, the Basel Committee introduced the Standardized Measurement Approach (SMA) for calculating operational risk capital. Which of the following statements BEST describes the SMA and its reasons for introduction?
a. The SMA replaces the Basic Indicator Approach (BIA) and the Standardized Approach (SA) but retains the Advanced Measurement Approach (AMA) for more sophisticated banks. It was introduced to provide a more risk-sensitive approach than the BIA and SA.
b. The SMA replaces all previous approaches, including the AMA. It calculates operational risk capital based on the Business Indicator (BI), which is designed to be a more relevant measure of bank size than gross income and a loss component based on historical losses. The SMA was introduced to reduce the variability in capital calculations across banks.
c. The SMA is an additional approach that supplements the BIA, SA, and AMA. It calculates operational risk capital based on the Business Indicator (BI) and a loss component. It was introduced to provide banks with more flexibility in determining their capital requirements.
d. The SMA replaces only the AMA and retains the BIA and SA for less sophisticated banks. It calculates operational risk capital based on the Business Indicator (BI) and a loss component, and it was introduced to simplify the capital calculation process for banks using the AMA.
Answers here:
Questions:
24.7.1. Which of the following scenarios BEST illustrates the operational risk category of "Clients, products, and business practices"?
a. A bank's trading system experiences a software glitch, which delays the execution of client orders and results in financial losses.
b. A bank employee intentionally misreports trading positions to conceal unauthorized trades, leading to a significant loss when the trades are discovered.
c. A bank fails to properly implement anti-money laundering controls, allowing criminals to use the bank's services to launder funds from illegal activities.
d. A natural disaster damages a bank's headquarters, forcing a temporary closure of the building and disrupting business operations.
24.7.2. Which of the following statements BEST compares the Basic Indicator Approach (BIA), the Standardized Approach (SA), and the Advanced Measurement Approach (AMA) for calculating operational risk regulatory capital under Basel II?
a. The BIA and SA use a fixed percentage of gross income, while the AMA requires banks to estimate the 99.9th percentile of the loss distribution minus the expected operational loss.
b. The BIA applies a single percentage to gross income, the SA applies varying percentages based on business lines, and the AMA uses a combination of internal and external loss data.
c. The BIA and SA require banks to consider every combination of business lines and risk types, while the AMA allows banks to use their own internal models.
d. The BIA, SA, and AMA all require banks to estimate the 99.9th percentile of the one-year loss for each combination of business lines and risk types.
24.7.3. In 2016, the Basel Committee introduced the Standardized Measurement Approach (SMA) for calculating operational risk capital. Which of the following statements BEST describes the SMA and its reasons for introduction?
a. The SMA replaces the Basic Indicator Approach (BIA) and the Standardized Approach (SA) but retains the Advanced Measurement Approach (AMA) for more sophisticated banks. It was introduced to provide a more risk-sensitive approach than the BIA and SA.
b. The SMA replaces all previous approaches, including the AMA. It calculates operational risk capital based on the Business Indicator (BI), which is designed to be a more relevant measure of bank size than gross income and a loss component based on historical losses. The SMA was introduced to reduce the variability in capital calculations across banks.
c. The SMA is an additional approach that supplements the BIA, SA, and AMA. It calculates operational risk capital based on the Business Indicator (BI) and a loss component. It was introduced to provide banks with more flexibility in determining their capital requirements.
d. The SMA replaces only the AMA and retains the BIA and SA for less sophisticated banks. It calculates operational risk capital based on the Business Indicator (BI) and a loss component, and it was introduced to simplify the capital calculation process for banks using the AMA.
Answers here:
