Basel ii operational risk

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In the BIA approach, if the sum of Gross income is negative, we exclude it, in calculating the avaerage.
what happens if sum of gross income of a particular year is zero,
should the divider be 3 or 2 in calculating the average..

Regards

 

[David Harper CFA FRM]

Hi vinoth,

Great question, I had to look it up (emphases are mine):

Basel para "649. Banks using the Basic Indicator Approach must hold capital for operational risk equal to the average over the previous three years of a fixed percentage (denoted alpha) of positive annual gross income. Figures for any year in which annual gross income is negative or zero should be excluded from both the numerator and denominator when calculating the average."
... and further supported by Basel's formula:
"N = number of the previous three years for which gross income is positive "

therefore, summation to zero suggests the divider should be two, not three. Thanks for bringing this up, i hadn't focused on it
in fact, my XLS (http://www.bionicturtle.com/how-to/spreadsheet/2011.7.c.5.-basel-oprisk-basic/ ) needs to be revised [I need to change =IF(D13<0;"";D13) to =IF(D13=<0;"";D13)]

It's not your (finer) point, and i realize you know this already from your question, but this exclusion of zeros and negatives is strange and different than the standardized approach which divides by three regardless. But under this BIA, a bank's capital can go down dramatically if, for a single year, it can boost the GOI from a negative/zero to a slight positive.

Thanks, David