Module: | MODULE B: RISK MANAGEMENT
Q418: Consider the following statements regarding the Basel III Standardised Measurement Approach (SMA) for calculating operational risk capital:
1. The SMA replaces all existing approaches, including the Advanced Measurement Approaches (AMA) and The Standardised Approach (TSA), to ensure global comparability.
2. The SMA calculation strictly relies on a combination of the Business Indicator Component (BIC) and the Internal Loss Multiplier (ILM).
3. Under the new SMA framework, banks are still permitted to use their own proprietary internal models for calculating operational risk regulatory capital.
Which of the statements given above is/are correct?
2. The SMA calculation strictly relies on a combination of the Business Indicator Component (BIC) and the Internal Loss Multiplier (ILM).
3. Under the new SMA framework, banks are still permitted to use their own proprietary internal models for calculating operational risk regulatory capital.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The Basel Committee introduced the Standardised Measurement Approach (SMA) to replace all existing operational risk calculation methodologies.
This explicitly abolishes the Advanced Measurement Approaches (AMA), The Standardised Approach (TSA), and the Basic Indicator Approach (BIA), thereby creating a single, uniform standard for global comparability.
Statement 2 is correct: The mathematical foundation of the SMA relies strictly on multiplying two elements: the Business Indicator Component (BIC), which acts as a financial statement-based proxy for operational risk exposure, and the Internal Loss Multiplier (ILM), which scales the capital requirement based on the bank's actual historical operational losses over the past 10 years.
Statement 3 is incorrect: The core purpose of introducing SMA was to remove the variability and complexity associated with internally modeled capital charges.
Under the new Basel III operational risk framework, banks are strictly forbidden from using their own proprietary internal models to calculate regulatory capital.
Therefore:
Option A is correct as both Statement 1 and 2 are true.
Option B is incorrect because Statement 3 is false.
Option C is incorrect because Statement 3 is false.
Option D is incorrect because Statement 3 is false.
This explicitly abolishes the Advanced Measurement Approaches (AMA), The Standardised Approach (TSA), and the Basic Indicator Approach (BIA), thereby creating a single, uniform standard for global comparability.
Statement 2 is correct: The mathematical foundation of the SMA relies strictly on multiplying two elements: the Business Indicator Component (BIC), which acts as a financial statement-based proxy for operational risk exposure, and the Internal Loss Multiplier (ILM), which scales the capital requirement based on the bank's actual historical operational losses over the past 10 years.
Statement 3 is incorrect: The core purpose of introducing SMA was to remove the variability and complexity associated with internally modeled capital charges.
Under the new Basel III operational risk framework, banks are strictly forbidden from using their own proprietary internal models to calculate regulatory capital.
Therefore:
Option A is correct as both Statement 1 and 2 are true.
Option B is incorrect because Statement 3 is false.
Option C is incorrect because Statement 3 is false.
Option D is incorrect because Statement 3 is false.