Banks using the Basic Indicator Approach must hold capital for operational risk equal to the average over the previous three years of a fixed percentage (denoted alpha) of positive annual gross income. Figures for any year in which annual gross income is negative or zero should be excluded from both the numerator and denominator when calculating the average. 1
This chapter describes the Basic Indicator Approach for calculating operational risk capital requirements. This is the simplest of the three approaches.
This version has been removed on 27 Mar 2020
Effective as of:
15 Dec 2019
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Last update:
15 Dec 2019
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1 Footnote
20.2
The capital requirement under the Basic Indicator Approach, KBIA, may be expressed as follows, where GI is annual gross income, where positive, over the previous three years; n is the number of the previous three years for which gross income is positive; and α is 15% (set by the Committee, relating the industry-wide level of required capital to the industry-wide level of the indicator).
20.3
Gross income is defined as net interest income plus net non-interest income.2 It is intended that this measure should:
(1)
be gross of any provisions (eg for unpaid interest);
(2)
be gross of operating expenses, including fees paid to outsourcing service providers;3
(3)
exclude realised profits / losses from the sale of securities in the banking book;4 and
(4)
exclude extraordinary or irregular items as well as income derived from insurance.
3 Footnotes
20.4
As a point of entry for capital calculation, no specific criteria for use of the Basic Indicator Approach are set out in this Framework. Nevertheless, banks using this approach are encouraged to comply with the Committee’s guidance on Principles for the Sound Management of Operational Risk, June 2011.