Regulation on Bank Capital Adequacy

Article 6Operational Risk1. Banks shall apply the basic indicator approach (BIA) under the Basel II capital framework.a) The BIA requires a capital charge of 15 % (fifteen percent) of gross income be addedto the risk weighted assets of the bank in calculating the risk-asset ratio. Grossincome is defined as net interest income plus net non-interest income. It is intendedthat this measure should:i. be gross of any provisions (e.g. for unpaid interest);ii. be gross of operating expenses, including fees paid to outsourcing serviceproviders;iii. exclude realized profits/losses from the sale of securities; andiv. exclude extraordinary or irregular items as well as income derived frominsurance.b) For newly established banks with less than three years data, the new bank shall useany actual gross income earned to date for purposes of deriving the average grossincome, while leaving the gross income for any remaining quarters as zero.2. Subject to the CBK’s prior approval, banks may use SA to calculate its operational riskcapital charges. Under the SA the capital requirement for operational risk is the average overthree years of the risk-weighted relevant indicators calculated each year across the businesslines (see Annex II). In each year, a negative capital requirement in one business line,resulting from a negative relevant indicator may be imputed to the whole. However, wherethe aggregate capital charge across all business lines within a given year is negative, then theinput to the average for that year shall be zero. The three-year average is calculated on thebasis of the last three twelve-monthly observations at the end of the financial year. Whenaudited figures are not available, business estimates may be used.Article 7Market RiskAs at present levels of market risk run by banks in the Republic of Kosovo are extremely lowand in most case negligible, the CBK does not intend to apply a capital charge at present andwill rely on the buffer provided by the fact that the minimum overall risk-weighted ratio isrelatively high. For market risk, the CBK will consider applying the standardized approach inthe Basel II framework if the situation changes.Article 8Capital PlanningCBK requires banks to develop an internal process for capital adequacy planning in relationto their risk profiles, which continuously presents the adequate level of capital, estimated bythe bank. The bank’s internal process for planning the adequacy level of capital will besubject to CBK assessment.