Module: | MODULE B: RISK MANAGEMENT
Q313: Calculate the capital charge for Operational Risk using the Basic Indicator Approach (BIA), given the following Gross Income data for the last three years:
Year 1 = ₹ 200 Crore
Year 2 = ₹ -50 Crore (Negative)
Year 3 = ₹ 100 Crore
(Note: The regulatory Alpha factor is 15 percent).
Year 2 = ₹ -50 Crore (Negative)
Year 3 = ₹ 100 Crore
(Note: The regulatory Alpha factor is 15 percent).
✅ Correct Answer: C
The correct answer is C (₹ 22.5 Crore). Under the Basic Indicator Approach (BIA) for Operational Risk, banks must hold capital equal to 15% (the Alpha factor) of their average positive annual Gross Income over the previous three years.
A critical rule in this calculation is that figures for any year in which the annual gross income is negative or zero must be completely excluded from both the numerator and the denominator.
Step 1: Identify positive years (Year 1: 200, Year 3: 100). Year 2 is negative, so drop it.
Step 2: Calculate the average of the valid years. (200 + 100) / 2 years = 150 Crore.
Step 3: Apply the 15% Alpha factor.
15% of 150 = ₹ 22.5 Crore.
Option A incorrectly divides by 3. Option B incorrectly adds the negative 50.
Option D is a random calculation.
A critical rule in this calculation is that figures for any year in which the annual gross income is negative or zero must be completely excluded from both the numerator and the denominator.
Step 1: Identify positive years (Year 1: 200, Year 3: 100). Year 2 is negative, so drop it.
Step 2: Calculate the average of the valid years. (200 + 100) / 2 years = 150 Crore.
Step 3: Apply the 15% Alpha factor.
15% of 150 = ₹ 22.5 Crore.
Option A incorrectly divides by 3. Option B incorrectly adds the negative 50.
Option D is a random calculation.