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FRM Part II · FRM Exam Part II · Capital Regulation Before the Global Financial Crisis

Under the Basel II Basic Indicator Approach (BIA) for operational risk, a bank's capital charge is calculated as a fixed percentage of which measure?

The Basic Indicator Approach charges 15% of average annual positive gross income over the previous three years. Years with zero or negative gross income are excluded from both numerator and denominator, and the charge does not depend on assets, profit or existing capital.

  1. AAverage annual positive gross income over the previous three yearsCorrect
  2. BTotal risk-weighted assets at the latest year-end
  3. CAverage annual net profit after tax over the previous five years
  4. DTotal regulatory capital held at the latest year-end

Explanation

The BIA sets the charge at 15% of average annual gross income over the previous three years, counting only years in which gross income was positive. It does not use risk-weighted assets, net profit or existing capital.

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