The Basic Indicator Approach (BIA) is a simple approach for calculating the capital charge for operational risk. It can be used by banks that are not internationally active, as well as by banks that are internationally active but may not as yet have risk management systems in place for using the more advanced approaches for measuring operational risk. Below is an example of ABC bank and how the Operational risk capital charge is calculated on Basic Indicator Approach

1- Calculating gross income through the table shows part of the income statement of ABC bank for 2003.

The net interest income to be used in gross income for calculating the operational risk capital charge after provisions. Normally banks reduce this amount to arrive at the operating income, however, in the calculation of capital charge for operational risk, net interest income is gross of provisions.

In this example, net interest income is interest income minus interest expenses.

150 – 110 = 40

While for calculating net non-interest income for calculating operational risk capital charge, in this example:

Net non-interest income is fees and commissions received (80) minus fees and commissions paid, adjusted for outsourcing fees paid (50 – 12 = 38). Therefore, the amount will be 42.

2- Calculating operational risk capital charge under BIA

The following table shows how to calculate the operational risk capital charge under the BIA.

3- Treatment of Negative Gross Income

Below is the calculation of the operational risk capital charge when the bank has negative gross income for a year.

Since negative gross income leads to exclusion of data points for that year from both the numerator and the denominator of the BIA operational risk formula, it could at times result in some distortions. For example, a bank that has negative gross income for one of three years might end up with a higher operational risk capital charge than if it were to have positive gross income for that year, even if it was a small amount. To ensure that such distortions do not occur, the supervisor should review and consider appropriate actions under Pillar 2.

1- Below is small example indicated which to include and exclude in the gross income:

Gross income for each business line should:

1. -Be gross of any provisions (for example, for unpaid interest).
2. -Be gross of operating expenses, including fees paid to outsourcing service providers.
3. -Exclude realised profits/losses from the sale of securities in the banking book.
4. -Exclude extraordinary or irregular items as well as income derived from insurance claims.

2- The following table shows how to calculate the capital charge for operational risk using the Standardised Approach:

*Gross Income x Beta factor

**Sum of eight capital charges for the year – remember within a year negative capital charges can offset positive charges among business lines

***Three-year average capital charge

3- Another example to illustrate the negative Gross income:

*Total capital charge against all business lines for year 2 is negative (-17.1), so the numerator for year 2 is set to zero

**Capital charge averaged for three years, with the numerator for year 2 set to zero

The following table shows how to calculate the capital charge for operational risk using the Alternative Standardised Approach.

*Gross income/loans & advances ^x m
**Exposure indicator (GI or LA ^x m) ^x β
***Outstanding loans and advances ^x m (0.035)
# Sum of eight capital charges for the year
## Three year average capital charge