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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:
KBIA = [∑(GI1.nα)]/n

where:

KBIA = 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.

January 2015