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Gforunpaidinterestandwriteoffsmadeduring theyear

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Unformatted text preview: apital available to support market risk (105­90) • Tier 1­ (55­45) 10 Capital Adequacy Framework • Tier 2­ (50­45) 5 15 46 Market Risk – Internal Models BIS requirement: BIS requirement: 1. VaR to be calculated daily 2. Confidence level of 99% 3. Holding period 10 days 4. Historical data for at least one year to be taken and updated at least once in a quarter . 02/23/13 Capital Adequacy Framework 47 Capital Charge for Operational Risk Capital Definition of Operational Risk Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk. Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements. The measurement methodologies The New Capital Adequacy Framework outlines three methods for calculating operational risk capital charges in a continuum of increasing sophistication and risk sensitivity: (i) the Basic Indicator Approach (BIA); (ii) the Standardised Approach (TSA); and (iii) Advanced Measurement Approaches (AMA). 02/23/13 Capital Adequacy Framework 48 The Basic Indicator Approach The Under the Basic Indicator Approach, banks must hold capital for operational risk equal to the average over the previous three years of a fixed percentage (denoted as 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. If negative gross income distorts a bank’s Pillar 1 capital charge, Reserve Bank will consider appropriate supervisory action under Pillar 2. The charge may be expressed as follows: KBIA = [ Σ (GI1…n x α )]/n 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 α = 15 per cent, which is set by the BCBS , relating the industry wide level of required capital to the industry wide level of the indicator. 02/23/13 Capital Adequacy Framework 49 The Basic Indicator Approach The Gross income is defined as “Net interest income” plus “net non­interest income”. It is intended that this measure should: i) be gross of any provisions (e.g. for unpaid interest) and write­offs made during the year; ii) be gross of operating expenses, including fees paid to outsourcing service providers, in addition 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; iii) exclude reversal during the year in respect of provisions and write­offs made during the previous year(s); iv) exclude income recognised from the disposal of items of movable and immovable property; v) exclude realised profits/losses from the sale of securities in the “held to maturity”...
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