7.6 Basic indicator approach

(1) A Bank must use the basic indicator approach to operational risk. Operational risk capital requirement is the amount of capital that the Bank must have to cover its operational risk.

(2) The Bank’s Operational Risk capital requirement is calculated in accordance with the following formula:

where:

GI is the Bank’s average annual gross income (as defined in sub-rule (3) or (4)) for those years (out of the previous 3 years) for which the Bank’s annual gross income is more than zero.

α is 15% or a higher percentage set by the AFSA.

n is the number of years out of the previous 3 years for which the Bank’s gross income is more than zero.

(3) Because of the definitions of GI and n in (2) above, figures for any year in which the annual gross income of a Bank is negative or zero must be excluded from both the numerator and denominator when calculating the average.

(4) For a Bank, gross income, for a year, means net interest income plus net non-interest income for the year. It must be gross of:

1. (a) any provisions (including provisions for unpaid interest);
2. (b) operating expenses; and
3. (c) losses from the sale of securities in the ‘Held to Maturity’ and ‘Available for Sale’ categories in the Banking Book.

(5) For a Bank, gross income excludes:

1. (a) realised profits from the sale of securities in the Banking Book;
2. (b) realised profits from securities in the ‘Held to Maturity’ category in the Banking Book;
3. (c) extraordinary or irregular items of income;
4. (d) income derived from insurance;
5. (e) any collection from previously written-off loans; and
6. (f) income obtained from the disposal of real estate and other assets during the year.