Basic indicator approach
Encyclopedia
The basic approach or basic indicator approach is a set of operational risk measurement techniques proposed under Basel II
capital adequacy rules for banking institutions.
Basel II requires all banking institutions to set aside capital for operational risk
. Basic indicator approach is much simpler compared to the alternative approaches (i.e. standardized approach (operational risk)
and advanced measurement approach
) and this has been recommended for banks without significant international operations.
Based on the original Basel Accord, 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 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.
The fixed percentage ‘alpha’ is typically 15 percent of annual gross income.
Basel II
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision...
capital adequacy rules for banking institutions.
Basel II requires all banking institutions to set aside capital for operational risk
Operational risk
An operational risk is, as the name suggests, a risk arising from execution of a company's business functions. It is a very broad concept which focuses on the risks arising from the people, systems and processes through which a company operates...
. Basic indicator approach is much simpler compared to the alternative approaches (i.e. standardized approach (operational risk)
Standardized approach (operational risk)
In the context of operational risk, the standardized approach or standardised approach is a set of operational risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions....
and advanced measurement approach
Advanced measurement approach
Under Basel II, operational risk charges can be calculated by using one of the three methods that increase in sophistication and risk sensitivity: the Basic Indicator Approach; the Standardised Approach; and Advanced Measurement Approaches .Under AMA the banks are allowed to develop their own...
) and this has been recommended for banks without significant international operations.
Based on the original Basel Accord, 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 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.
The fixed percentage ‘alpha’ is typically 15 percent of annual gross income.
See also
- Standardized approach (operational risk)Standardized approach (operational risk)In the context of operational risk, the standardized approach or standardised approach is a set of operational risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions....
- Advanced measurement approachAdvanced measurement approachUnder Basel II, operational risk charges can be calculated by using one of the three methods that increase in sophistication and risk sensitivity: the Basic Indicator Approach; the Standardised Approach; and Advanced Measurement Approaches .Under AMA the banks are allowed to develop their own...
- Capital Requirements DirectiveCapital Requirements DirectiveThe Capital Requirements Directive for the financial services industry will introduce a supervisory framework in the EU which reflects the Basel II rules on capital measurement and capital standards....
- Operational riskOperational riskAn operational risk is, as the name suggests, a risk arising from execution of a company's business functions. It is a very broad concept which focuses on the risks arising from the people, systems and processes through which a company operates...
- Reputational riskReputational riskReputational risk, often called reputation risk, is a type of risk related to the trustworthiness of business. Damage to a firm's reputation can result in lost revenue or destruction of shareholder value, even if the company is not found guilty of a crime...
- Basel IIBasel IIBasel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision...