The Basel II required that all banking institutions set aside capital for operational risk. The operational risk can be assessed by which of the following approaches as per Basel II?

A.    Internal Rating Based (IRB) Approach

B.    Basic Indicator Approach (BIA)

C.   Advanced Measurement Approach (AMA)

D.   Value at Risk (VaR)

Solution

The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk, and market risk. ·         The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB, Advanced IRB and General IB2 Restriction. IRB stands for "Internal Rating-Based Approach". ·         For operational risk, there are three different approaches – basic indicator approach or BIA, standardized approach or TSA, and the internal measurement approach (an advanced form of which is the advanced measurement approach or AMA). ·         For market risk the preferred approach is VaR (value at risk).