An ADI must calculate its operational risk capital charge as 12 per cent of its business indicator (BI), plus:

if the BI exceeds $1.5 billion, then 3 per cent of the amount by which the BI exceeds $1.5 billion, plus

if the BI exceeds $45 billion, then 3 per cent of the amount by which the BI exceeds $45 billion.

An ADI must calculate its BI as set out in paragraphs 15 to 22 of this Prudential Standard.

For the purposes of paragraph 15 of this Prudential Standard, an ADI’s interest component is the annual average value over the most recent three years of the absolute value of the following calculation:

the ADI’s interest income from all financial assets and other interest income, including interest income from finance and operating leases and profits from leased assets, less

the ADI’s interest expenses from all financial liabilities and other interest expenses, including interest expense from finance and operating leases, losses, depreciation and impairment of operating leased assets.

For the purposes of paragraph 15 of this Prudential Standard, an ADI’s asset component is 2.25 per cent times the average value over the most recent three years of the sum of the ADI’s total gross outstanding loans (including non-performing loans), advances, interest bearing securities (including government bonds) and lease assets, measured at the end of each financial year.

For the purposes of paragraph 15 of this Prudential Standard, an ADI’s dividend component is the annual average over the most recent three years of the ADI’s dividend income from investments in stocks and funds not consolidated in the ADI’s financial statements, including dividend income from non-consolidated subsidiaries, associates and joint ventures.

For the purposes of paragraph 15 of this Prudential Standard, an ADI’s other operating component is the maximum of:

the annual average over the most recent three years of the ADI’s other operating income and income not included in other BI components calculated according to paragraphs 15 to 22 of this Prudential Standard,[2] and

the annual average over the most recent three years of the ADI’s other operating expenses and expenses not included in other BI components calculated in accordance with paragraphs 15 to 22 of this Prudential Standard.[3]

For the purposes of paragraph 15 of this Prudential Standard, an ADI’s fee and commission component is the maximum of:

the annual average over the most recent three years of the ADI’s fee and commission income;[4] and

the annual average over the most recent three years of the ADI’s fee and commission expenses.[5]

For the purposes of paragraph 15 of this Prudential Standard, an ADI’s trading book component is the annual average over the most recent three years of the absolute value of the net profit (loss) on the ADI’s trading book.[6] This includes the net profit (loss) on trading assets and trading liabilities, hedge accounting and exchange differences.

For the purposes of paragraph 15 of this Prudential Standard, an ADI’s banking book component is the annual average over the most recent three years of the absolute value of the net profit (loss) on the ADI’s banking book.[7] This includes the net profit (loss) on financial assets and liabilities measured at fair value through profit or loss, hedge accounting and exchange differences and realised gains (losses) on financial assets and liabilities not measured at fair value through profit or loss.

For the avoidance of doubt, an ADI must not include the following items in the calculation of a component of the BI in paragraphs 15 to 22 of this Prudential Standard:

income and expenses from insurance or reinsurance businesses;

premiums paid and reimbursements/payments received from insurance or reinsurance policies purchased;

administrative expenses, including staff expenses, outsourcing fees paid for the supply of non-financial services (e.g. logistical, information technology, or human resources services) and other administrative expenses, (e.g. expenses related to information technology, utilities, telephone, travel, office supplies, or postage);

recovery of administrative expenses including recovery of payments on behalf of customers (e.g. taxes debited to customers);

expenses of premises and fixed assets, except when these expenses result from operational loss events;

depreciation/amortisation of tangible and intangible assets, except depreciation/amortisation related to lease assets, which should be included in finance and operating lease expenses;

provisions or reversal of provisions (e.g. on pensions, commitments and guarantees given), except provisions related to operational loss events;

expenses due to share capital repayable on demand;

impairment or reversal of impairment (e.g. on financial assets, non-financial assets, investments in subsidiaries, joint ventures and associates);

changes in goodwill recognised in profit or loss; or

corporate income tax (tax based on profits including current tax and deferred tax).

An ADI must base the calculations in paragraphs 15 to 22 of this Prudential Standard on the most recent three years of its audited year-end financial statements. Where an ADI does not have audited financial statements from each of the previous three years (e.g. in the case of an ADI in the early years of its operation), it must obtain APRA’s approval to use an alternative calculation methodology.

In the event of a merger or acquisition, an ADI must use aggregated values when calculating the BI as set out in paragraphs 15 to 22 of this Prudential Standard, unless otherwise approved by APRA.

Subject to APRA’s approval, an ADI may exclude divested activities when calculating the BI as set out in paragraphs 15 to 22 of this Prudential Standard.