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6. CALCULATION OF CAPITAL FOR OPERATIONAL RISK

Indian Bank Provides following information:

Picture

Based on the above information, answer the following questions:
1. What is the amount of capital charge for operational risk, on the basis of 1st Year's results alone.
a. 100 cr      b. 120 cr       c. 150 cr     d. 135 cr
Ans : b
EXPLANATION:
Capital Charge 

= Gross Income X 15%
Whereas Gross Income (G I) = Net profit+ Provisions + Staff Expenses + Other Operating Expenses 
= 120 + 240 +  280 + 160 
= 800 cr
Thus, Capital Charge = 800 X 15%
                            = INR 120 cr

2. What is the amount of capital charge for operational risk, on the basis of 2nd Year's results alone.
a. 100 cr      b. 120 cr       c. 150 cr     d. 135 cr
Ans : c
EXPLANATION:
Capital Charge 

= Gross Income X 15%
Whereas Gross Income (G I) = Net profit+ Provisions + Staff Expenses + Other Operating Expenses 
= 150 + 290 + 320 + 240 
= 1000 cr 
Thus, Capital Charge = 1000 X 15%
                            = INR 150 cr

3. What is the amount of capital charge for operational risk, on the basis of both 1st and 2nd Year's results.
a. 100 cr      b. 120 cr      c. 135 cr      d. 150 cr 
Ans : c
EXPLANATION:
Capital Charge 

= Gross Income X 15%
Whereas Gross Income (G I) = Net profit+ Provisions + Staff Expenses + Other Operating Expenses 
1st Year   = 120 + 240 +  280 + 160 
             = 800 cr
2nd Year  = 150 + 290 + 320 + 240 
             = 1000 cr 
Average Gross Income = (800 + 1000)   = 900 cr
                                      2
Thus, Capital Charge = 900 X 15%
                            = INR 135 cr

4. What is the amount of Risk weighted assets for operational risk as per BASEL Recommendations, on the basis of 1st Year's results alone. 
a. 1333.33 cr                  b. 1687.50 cr  
c. 1875 cr                      d. Incomplete Information
Ans : a
           = Capital Charge​    = 120  = INR 1333.33 cr
                     9%               9%

5. What is the amount of Risk weighted assets for operational risk as per BASEL Recommendations, on the basis of 2nd Year's results alone. 
a. 1500 cr                     b. 1687.50 cr  
c. 1666.66 cr                  d. Incomplete Information
Ans : c
           = Capital Charge​    = 150  = INR 1666.66cr
                     9%               9%

6. What is the amount of Risk weighted assets for operational risk as per BASEL Recommendations, on the basis of both 1st and 2nd Year's results. 
a. 1500 cr                  b. 1687.50 cr  
c. 1875 cr                  d. Incomplete Information

Ans : a
           = Capital Charge​    = 135  = INR 1500 cr
                     9%               9%
​

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