The basic approach or basic indicator approach is a set of
operational risk 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 It is now extended and partially superseded by Basel III.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.
The basic indicator approach, however, is much simpler as compared to the alternative approaches (i.e.
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.
Basel II requires all banking i ...
and
advanced measurement approach
Advanced measurement approach (AMA) is one of three possible operational risk methods that can be used under Basel II by a bank or other financial institution. The other two are the Basic Indicator Approach and the Standardised Approach. The ...
) 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
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Advanced measurement approach
Advanced measurement approach (AMA) is one of three possible operational risk methods that can be used under Basel II by a bank or other financial institution. The other two are the Basic Indicator Approach and the Standardised Approach. The ...
*
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 It is now extended and partially superseded by Basel III.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
*
Reputational risk
Reputational damage is the loss to financial capital, social capital and/or market share resulting from damage to a firm's reputation. This is often measured in lost revenue, increased operating, capital or regulatory costs, or destruction of sh ...
*
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.
Basel II requires all banking i ...
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