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Title[ Part 2: The First Pillar - Minimum Capital Requirements

Section[ 1. The Basic Indicator Approach

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649.     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 (denoted alpha) 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. ⁹⁹ The charge may be expressed as follows:

99   If  negative  gross  income  distorts  a  bank’s  Pillar  1  capital  charge,  supervisors  will  consider  appropriate supervisory action under Pillar 2.

where:

KBIA   =   the capital charge under the Basic Indicator Approach

GI        =   annual gross income, where positive, over the previous three years

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

?           =   15%, which is  set by the Committee, relating the industry wide level of required capital to the industry wide level of the indicator.

650.     Gross income is defined as net interest income plus net non-interest income. ¹⁰⁰ It is intended that 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 providers; ¹⁰¹

(iii) exclude  realised profits/losses from the sale of securities in the banking book; ¹⁰² and

(iv) exclude extraordinary or irregular items as well as income derived from insurance.

651.     As a point  of entry for capital calculation, no  specific criteria for use of the Basic Indicator Approach are set out in this Framework. Nevertheless, banks using this approach are  encouraged  to  comply  with  the  Committee’s  guidance  on  Sound  Practices  for  the Management and Supervision of Operational Risk, February 2003.

100 As defined by national supervisors and/or national accounting standards.

101 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.

102 Realised profits/losses from securities classified as “held to maturity” and “available for sale”, which typically constitute items of the banking book (e.g.  under certain  accounting standards), are also excluded from the definition of gross income.

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