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Developed in conjunction with Ext-Joom.com
Our Capital Adequacy Ratio (CAR) dashboard pulls together CAR estimates by combining approved methods for Credit, Market and Operational Risk. On a single screen you can easily see the impact of your selection of methods on risk capital and capital adequacy ratios. In addition, it is also possible to compare 8 different combination of CAR figures created by mixing allowed approaches across credit, market and operational risk capital calculations.
The final step in the capital adequacy ratio estimation calculation is incorporating the impact of risk capital allocated to operational risk. The Vision ERM platform supports two operational risk capital calculation methodologies. Inclusion of Operational Risk Capital allows for the integrated calculation of capital adequacy ratio for the bank on one comprehensive platform.
The Basic Indicator Approach
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
The Standardized Approach
In the Standardized Approach, banks' activities are divided into eight business lines: corporate finance, trading & sales, retail banking, commercial banking, payment & settlement, agency services, asset management and retail brokerage.
Within each business line, gross income is a broad indicator that serves as a proxy for the scale of business operations and thus the likely scale of operational risk exposure within each of these business lines. The capital charge for each business line is calculated by multiplying gross income by a factor (denoted beta) assigned to that business line. Beta serves as a proxy for the industry-wide relationship between the operational risk loss experience for a given business line and the aggregate level of gross income for that business line. It should be noted that in the Standardized Approach gross income is measured for each business line, not the whole institution, i.e. in corporate finance, the indicator is the gross income generated in the corporate finance business line.
The total capital charge is calculated as the three-year average of the simple summation of the regulatory capital charges across each of the business lines in each year. In any given year, negative capital charges (resulting from negative gross income) in any business line may offset positive capital charges in other business lines without limit. However, where the aggregate capital charge across all business lines within a given year is negative, then the input to the numerator for that year will be zero.