Basic indicator approach
The basic indicator approach is the simplest method for determining the regulatory capital backing for operational risks of credit institutions within the framework of Basel II . In Germany, the rules are implemented in the Solvency Regulation (§ 270f). Alternative methods are the standard approach and the advanced measurement approach . In 2016, the BCBS published the latest consultation letter, which indicates that the basic indicator approach should be replaced by the newer business indicator as an estimator for operational risks.
Calculation of the equity requirement when using the basic indicator approach
When using the basic indicator approach, the credit institution is obliged to hold equity in the amount of 15% of the three-year average of the risk indicator defined in the Solvency Regulation to cover operational risk. The average is to be determined over the gross income of the last three years, negative values are not taken into account when calculating the average. The gross income is defined on the basis of the income statement items of the Financial Institutions Accounting Ordinance (RechKredV).
The advantage of the basic indicator approach lies in the simple determination of the capital requirements. However, the equity requirement is typically lower when using the standardized approach or the AMA . This rule reflects the fact that not using more advanced risk management methods leads to increased risk. The disadvantage is that the gross return indicator is not causally related to the risk exposure.
