2016-FRR Exam Dumps | Under the Basel II Accord, when using the Basic Indicator Approach to calculate its operational risk

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GARP.2016-FRR.v2025-06-21.q161
Question 80

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Question 80/161

Under the Basel II Accord, when using the Basic Indicator Approach to calculate its operational risk capital, a bank multiplies how many years of gross income by what percentage?

A. One year multiplied by 5%

B. Two years multiplied by 10%

C. Three years multiplied by 15%

D. Four years multiplied by 20%

Correct Answer: C

Comprehensive and Detailed In-Depth Explanation:
The Basic Indicator Approach (BIA) under Basel II is a simple method to calculate operational risk capital. It requires banks to hold capital equal to 15% of the average annual gross income over the previous three years, where gross income is defined as net interest income plus net non-interest income (excluding extraordinary items). Only positive gross income years are included in the average. The formula is:
Operational Risk Capital = 15% × (Average Gross Income over 3 years).
This is explicitly stated in the Basel II framework, making C (three years multiplied by 15%) correct. Other options do not align with the BIA requirements.
Reference:BCBS, "Basel II: International Convergence of Capital Measurement and Capital Standards," June
2006, para. 649-650; GARP FRR Study Notes, Operational Risk Section.

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