Basic indicator approach: Difference between revisions

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The term "Basic Approach" or "Basic Indicator Approach" refers to a set of operational risk measurement techniques proposed under [[Basel II]] capital adequacy rules for banking institutions.

Basel II requires all banking institutions to set aside capital for [[Operational Risk]]. Basic Indicator Approach recommendedis tomuch bankssimpler forcompared whomto morethe advancedalternative approaches (i.e. [[Standardized Approach (Operational Risk)]] and [[Advanced Measurement Approach]]) areand this has been recommended for banks without significant notinternational appropriateoperations.

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.