Calculating Operational Risk Capital Charges for Indonesian Rural Banks

Abstract

In January 2001, the Basel Committee on Banking Supervision published a proposal for a new capital framework, the “New Basel Capital Accord (Basel 11)” thus replacing Basel 1. One of the major motivations in the proposal is the introduction of explicit capital charge for operational risks in the business activities of banks. The objective of this paper is to estimate operational risk capital charge using historical data for 77 rural banks in Indonesia for a three-year period, 2006 to 2008. This study uses three approaches: (i) Basic Indicator Approach (BIA), (ii) Standardized Approach (SA) and (iii) Alternative Standardized Approach (ASA). We found that the average capital charge required to cover operational risk is IDR 154 million (1.5% of asset). When the calculation is conducted using the SA method, we found, on average a requirement of IDR 123 million (1.23% of asset). When the calculation is conducted using the Alternative Standardized Approach (ASA), the capital required was IDR 43 million (0.43% of asset). The results provide evidence that banks using more advance model require less capital charge.