Explanation:
Under the Basic Indicator Approach (BIA) of the Basel Accord, the capital charge for operational risk is equal to (which is set at 15%) multiplied by the average over the previous three years of positive annual gross income.
Gross income = Net interest income + Non-interest income.
The average gross income over the 3 previous years (2013, 2014, 2015) is:
Capital charge = $15% \times 124 = 18.6 \text{ USD million}$.
Q.66 Bakster Bank is following the basic indicator approach for calculating the operational risk amount for the year 2016. Some past financial details of the bank are given below:
| Year | Net interest income | Non-interest income |
|---|---|---|
| 2015 | 102 | 25 |
| 2014 | 104 | 22 |
| 2013 | 98 | 21 |
| 2012 | 91 | 17 |
(All amounts are in USD millions) Based on the original Basel Accord, the bank must hold capital for operational risk for 2016 equal to:
A
USD 18 million
B
USD 18.6 million
C
USD 24.8 million
D
USD 31 million
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