supervisors approval banks are not allowed to choose a simpler approach once it

Supervisors approval banks are not allowed to choose

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supervisors approval banks are not allowed to choose a simpler approach once it has been approved that a more advanced approach has to be applied. However, if a supervisor determines that a bank’s advanced approach no longer meets the qualifying criteria, it may require the bank to revert to a simpler approach for some or all of its operations, until it meets the conditions specified by the supervisor for returning to a more advanced approach. The basic indicator approach will be discussed in paragraph 4.1 and the standardized approach will be discussed in paragraph 4.2. For more information about the advanced measurement approach, please read Chapter 5. 4.1 The Basic Indicator approach The Basic Indicator Approach is the simplest, but it will charge the most capital generally. It's based on a straight percentage of gross income, which includes net interest income and net non- interest income but excludes extraordinary or irregular items. While this approach may roughly capture the scale of an institution’s operations, it surely has only the most questionable link to the risk of an expected loss due to internal or external events. Banks that uses 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. The charge may be expressed as follow: n GI K n i i 1 BIA (4) Where: BIA K = The capital charged under the Basic Indicator Approach. GI = 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). GI, the Gross income, will be defined as net interest income plus net non-interest income, as is defined by national supervisors and/or national accounting standards. The intention is that this measure should: Be gross of any provisions (e.g. for unpaid interest); Be gross of operating expenses, including fees paid to outsourcing service providers; (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); Exclude realized profits/losses from the sale of securities in the banking book; (Realized 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); Exclude extraordinary or irregular items as well as income derived from insurance.
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