Question

calculate the operational risk capital charge under Basel II using the standardized approach for the following data.

(in millions)	Year 1	Year 2	Year 3
Commercial banking	12	3	-4
Asset management	12	45	-12
Retail brokerage	3	21	-13

under the standard method, the operational risk capital charge is closest to

a. $22.35

b. $4.00

c. $33.50

d. $48.00

Give a detailed motivation.

Answer 1

The operational risk capital charge is calculated by taking the average of capital charges across each of the business lines in each year as below:

(in millions)	Year 1	Year 2	Year 3
Commercial banking (A)	12	3	-4
Asset management (B)	12	45	-12
Retail brokerage (C)	3	21	-13
Total (A+B+C)	$27	$69	-$29
Average (Total/3)	$9	$23	-$9.67

Now, we can determine the value of operational charge is arrived as follows:

Operational Risk Capital Charge = 9 + 23 + (-9.67) = $22.33 which is closest to $22.35

Answer is $22.35 (which is Option A)