CA-7.1.4

Conventional bank licensees applying 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 must be excluded from both the numerator and denominator when calculating the average.³⁷ The charge may be expressed as follows:
K_BIA = [∑(GI_1.nα)]/n

where:

K_BIA = the capital charge under the Basic Indicator Approach

GI = annual gross income, where positive, over the previous three years (audited financial years)

n = number of the previous three years for which gross income is positive

α = 15%, relating the industry wide level of required capital to the industry wide level of the indicator.

³⁷ If negative gross income distorts a bank's Pillar 1 capital charge, CBB will consider appropriate supervisory action.

CA-7.1.5

Gross income is defined as net interest income plus net non-interest income.³⁸ This measure should: (i) be gross of any provisions (e.g. for unpaid interest); (ii) be gross of operating expenses, including fees paid to outsourcing service providers³⁹; (iii) exclude realised profits/losses from the sale of securities in the banking book;⁴⁰ and (iv) exclude extraordinary or irregular items as well as income derived from insurance.

³⁸ As defined under International Financial Reporting Standards as applicable in the Kingdom of Bahrain.

³⁹ In contrast to fees paid for services that are outsourced, fees received by banks that provide outsourcing services shall be included in the definition of gross income.

⁴⁰ Realised profits/losses from securities classified as "held to maturity" and "available for sale", which typically constitute items of the banking book, are also excluded from the definition of gross income.

CA-7.1.6

In case of a bank with negative gross income for the previous three years, a newly licensed bank with less than 3 years of operations, or a merger, acquisition or material restructuring, the CBB shall discuss with the concerned licensed bank an alternative method for calculating the operational risk capital charge. For example, a newly licensed bank may be required to use the projected gross income in its 3-year business plan. Another approach that the CBB may consider is to require such licensed banks to observe a higher CAR.

CA-7.1.7

Conventional bank licensees applying this approach are encouraged to comply with the principles set in Section OM-8.2 of Operational Risk Management Module.