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In the Basel III standardized approach for operational risk, what is the Business Indicator?
Correct Answer: D
Step 1: Definition of the Business Indicator (BI) in Basel III The Business Indicator (BI) is a financial-statement-based metric used in Basel III's Standardized Approach for Operational Risk. It replaces previous approaches by using financial figures (e.g., revenue, fees, interest income) to estimate operational risk exposure. Step 2: Why Option D Is Correct The BI uses financial-statement data to calculate operational risk capital requirements. It acts as a proxy for a bank's operational risk exposure by linking operational risk to its financial size and complexity. Step 3: Why the Other Options Are Incorrect Option A ("Proxy for near-miss events") → Incorrect because BI is based on financial data, not near-miss risk events. Option B ("Non-financial-statement-based proxy") → Incorrect because BI is explicitly derived from financial statements. Option C ("Scaling factor based on historical losses") → Incorrect because BI does not use historical losses directly-it relies on financial-statement inputs. PRMIA Risk Reference Used: Basel III Operational Risk Framework - Defines the Business Indicator as a financial-statement-based metric. PRMIA Operational Risk Guidelines - Explains the BI's role in capital calculations.
