Question

Compare the Basic Indicator Approach and the Standardised Approach for operational risk management, highlighting their qualifying criteria, advantages, and disadvantages.

25 Apr 2025
Answer :
Word Count : 758

The Basic Indicator Approach (BIA) and the Standardised Approach (TSA) are two methods prescribed by the Basel II and Basel III frameworks for calculating capital requirements for operational risk in banks. Both approaches aim to determine the amount of regulatory capital that a bank must hold to cover potential operational risks, but they differ in terms of complexity, criteria, and risk sensitivity.

Basic Indicator Approach (BIA)

The Basic Indicator Approach is a relatively simple method that uses a single indicator to assess the capital charge for operational risk. Under BIA, the capital charge is calculated as a fixed percentage of a bank's gross income, which is considered the indicator of operational risk exposure.

Qualifying Criteria:

  • The bank must have a reliable and comprehensive system for reporting its gross income.

  • It is primarily used by smaller banks or those with less complex operations, as it is less data-intensive and easier to implement.

  • There are no specific requirements regarding the categorization of different types of business activities or risk exposure.

Advantages:

  • Simplicity: BIA is straightforward to implement and does not require ____ ______ _____ ___ _________ _____ _____ _________ _____.
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