• PRU A7.1 PRU A7.1 Basic Indicator Approach

    • PRU A7.1.1 PRU A7.1.1

      (1) (a) (i) An Authorised Person which uses the Basic Indicator Approach must calculate its Operational Risk Capital Requirement equal to the average over the previous three years of a fixed percentage (denoted by alpha) of positive annual gross income.
       (ii) For any year that annual gross income is zero or negative, that year must be excluded from both the numerator and the denominator in the calculation.
         (b) (i) Where an Authorised Person does not have sufficient data to meet the three-year requirement in (a) it must use its forecast annual gross income projections for that part of the three year time period for which it does not have sufficient historical data.
        (ii) The Authorised Person must start using historical data as soon as it is available.
      (2) In (1), if the figure for annual gross income in any of the previous three years is zero or negative an Authorised Person must exclude such amounts from the calculation of the average.
      (3) The Operational Risk Capital Requirement in (1) must be calculated according to the following formula:

      KBIA = [[Σ(GI1... n × α)] / n


      KBIA = the Operational Risk Capital Requirement under the Basic Indicator Approach

      GI = the gross annual income, where positive, over the previous three years

      n = number of the previous three years for which gross income is positive

      α = 15%,

      (4) For the purpose of (1), "gross income" is net interest income plus net non-interest income and must:
      (a) be gross of any provisions (e.g. for unpaid interest);
      (b) be gross of operating expenses, including fees paid to outsourcing service providers;
      (c) exclude realised profits/losses from the sale of Securities in the Non-Trading Book; and
      (d) exclude extraordinary or irregular items as well as income derived from insurance recoveries.

      • Guidance

        1. In (a), the three-year average should be calculated on the basis of the last three yearly observations at the end of the Authorised Person's financial year. When audited figures are not available, business estimates may be used.
        2. As an example of the approach to be used for (a)(ii), if an Authorised Person has two positive yearly gross incomes of $20 each and the final yearly observation shows a negative figure of $5, then the average should be calculated as $20 being $40 (the sum of the positive figures) divided by 2 (the number of years for which the figures are positive).
        3. The circumstances in (b) may arise, for example, where an Authorised Person is a start-up, is part of a merger or it acquires or divests itself of a significant business unit.
        4. Net interest income in A7.1.1(4) is the interest income minus interest expense. Guidance on what constitutes interest income and interest expense can be found in the PRU rules.
        5. Net non-interest income in A7.1.1(4) includes the income from fees and commissions, net income from trading Securities, net income from Investment Securities, income from Islamic Contracts and other operating income minus fee and commission expense. Guidance on non-interest income can be found in the PRU rules.
        6. In A7.1.1(4)(ii), outsourcing fees paid by the Authorised Person should be excluded whereas any outsourcing fee received by the Authorised Person should be included as part of the gross income.
        7. When income from revaluation of trading items is included in the income statement, such revaluation income should be included in the calculation of the gross income.