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CMA Final · Risk Management in Banking and Insurance · Operational Risk and Off-Balance Sheet Risk

Under the Basic Indicator Approach of Basel II for operational risk capital, a bank's gross income for the last three years was Rs 400 crore, Rs 500 crore and Rs 600 crore. Taking alpha as 15% and treating all three years as positive, what is the capital charge?

The capital charge is Rs 75 crore. Under the Basic Indicator Approach, the charge is 15% of average annual positive gross income over three years. The average of 400, 500 and 600 is Rs 500 crore, and 15% of that gives Rs 75 crore.

  1. ARs 60 crore
  2. BRs 75 croreCorrect
  3. CRs 90 crore
  4. DRs 45 crore

Explanation

BIA capital charge = alpha x average positive annual gross income of the previous three years. Average = (400+500+600)/3 = Rs 500 crore. Charge = 15% x 500 = Rs 75 crore. Rs 90 crore results from using the latest year's income of 600 instead of the average, which is wrong; Rs 60 crore wrongly uses the lowest year.

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