A. Basic Indicator Approach

C 52/2017 STA Effective from 1/4/2021

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.

Income statement of ABC bank for 2003
Operating income
Interest income	150
Interest expenses	110
Provisions made	20
Net interest income after provisions	20
Fees and commissions received	80
Fees and commissions paid	50
including fees paid for outsourcing	12
Other income From disposal of subsidiaries From disposal of available for sale Investments	10 8 0
Net non-interest income	48
Total operating income	68

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.

Year	Gross income of the bank
2002	120
2003	20
2004	250
Total positive GI for 3 years	390 (120+20+250)
Three year average of positive Gross Income	130 (390/3)
Alpha	15%
Operational risk capital requirement under BIA	19.5 ((39015%)/3 or 13015%

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.

	Amount
Gross income year 1	-120
Gross income year 2	20
Gross income year 3	250
Total of positive gross income	270
Number of years with positive gross income	2
Average of positive annual gross income for the last three years	135 (270/2)
Alpha	15%
Operational risk capital requirement	20.25 (135*15%)

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.