The basic approach or basic indicator approach is a set of
operational risk
Operational risk is the risk of losses caused by flawed or failed processes, policies, systems or events that disrupt business operations. Employee errors, criminal activity such as fraud, and physical events are among the factors that can tri ...
measurement techniques proposed under
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. It is now extended and partially superseded by Basel III.
The Basel II Accord was publ ...
capital adequacy rules for banking institutions.
Basel II requires all banking institutions to set aside capital for
operational risk
Operational risk is the risk of losses caused by flawed or failed processes, policies, systems or events that disrupt business operations. Employee errors, criminal activity such as fraud, and physical events are among the factors that can tri ...
.
The basic indicator approach, however, is much simpler as compared to the alternative approaches (i.e.
standardized approach (operational risk) and
advanced measurement approach) and thus 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. A standard deviation is commonly also taken.
The fixed percentage 'alpha' is typically 15 percent of annual gross income.
See also
*
Advanced measurement approach
*
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. It is now extended and partially superseded by Basel III.
The Basel II Accord was publ ...
*
Operational risk
Operational risk is the risk of losses caused by flawed or failed processes, policies, systems or events that disrupt business operations. Employee errors, criminal activity such as fraud, and physical events are among the factors that can tri ...
*
Reputational risk
Reputational damage is the loss to financial capital, social capital and/or market share resulting from damage to an organization's reputation. This is often measured in lost revenue, increased operating, capital or regulatory costs, or destructi ...
*
Standardized approach (operational risk)
References
*http://www.bis.org/publ/bcbsca.htm Basel II: Revised international capital framework (BCBS)
*http://www.bis.org/publ/bcbs107.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS)
*http://www.bis.org/publ/bcbs118.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision)
*http://www.bis.org/publ/bcbs128.pdf Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework, Comprehensive Version (BCBS) (June 2006 Revision)
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Basel II
Capital requirement
Operational risk