RBI/2009-10/372

DBOD. No. BP.BC. 84 /21.06.001/2009-10 March 31, 2010

The Chairman and Managing Directors/

Chief Executive Officers of
All Commercial Banks

Dear Sir

Implementation of The Standardised Approach (TSA) for

Calculation of Capital Charge for Operational Risk

Please refer to our circular DBOD BP. BC. 23/21.06.001/2009-10 dated July 7,
2009, inter alia advising banks that they can apply for migrating to The
Standardised Approach and Alternative Standardised Approach (ASA) for
Operational Risk from April 1, 2010 onwards.

2. The Basel II Framework presents three methods for calculating operational risk
capital charges in a continuum of increasing sophistication and risk sensitivity: (i)
the Basic Indicator Approach (BIA); (ii) the Standardised Approach (TSA); and (iii)
Advanced Measurement Approaches (AMA). A bank following BIA can switch over
to the AMA directly. However, as banks are aware, all the qualitative requirements
relating to operational risk management applicable to TSA form part of the
qualitative requirements for AMA. Therefore, if a bank does not have plans to
switchover to AMA before 2014, it may first consider moving to TSA so that the
work done by it in implementation of TSA could be used to meet part of the
requirements for AMA as and when the bank considers switching over to that

___________________________________________________________________________________________________

Department of Banking Operations and Development, Central Office, 12th Floor, Central Office Building, Shahid Bhagat
Singh Marg,, Mumbai,400001

Tel No:22661602 Fax No:22705691 Email ID:cgmicdbodco@rbi.org.in 

approach. Also, the banks which already have three year data of gross income of
different business lines may also first consider implementing TSA.

3. The guidelines on TSA/ASA, largely based on BCBS document, ‘International

Convergence of Capital Measurement and Capital Standards; June 2006 (Basel
II), are furnished in the Annex.

4. The basic methodology of calculation of capital charge for operational risk

remains the same as in case of Basic Indicator Approach (BIA) in as much as the
exposure indicator for operational risk continues to be Gross Income. However, in
TSA there is a requirement of mapping the activities of a bank into eight business
lines as indicated in Appendix 1 of the guidelines. In addition, banks also have to
meet minimum standards for management of operational risk including capturing of
operational loss data for individual business lines as indicated in the guidelines.

5. The banks interested in migrating to TSA/ASA for operational risk capital may
approach RBI (DBOD) with a formal application after March 31, 2010, with a write
up in support of their compliance with the provisions of the guidelines furnished in
the Annex. It may be reiterated that banks would have the discretion to adopt
TSA/ASA, while continuing with simpler approaches for computation of capital for
credit and market risks.

Yours faithfully

(B. Mahapatra)
Chief General Manager

 
 

Annex

Guidelines on The Standardised Approach for

Calculating Operational Risk Capital Charge

In comparison with the Basic Indicator Approach, The Standardized Approach

(TSA) is a more advanced method to determine the capital required for covering
operational risk losses. Under this approach, the business activities of a bank are
subdivided into standardized business lines and assigned a relevant indicator. The
capital requirement for operational risks corresponds to the sum of capital
requirements in the individual business lines. The bank choosing the TSA should
apply it both at solo bank level as well as across the entire banking group except
insurance business. However, if a bank is not able to apply TSA across the entire
banking group, it may initially apply TSA on solo level and Basic Indicator Approach
for other entities in the group. The bank should gradually move to its implementation
for the entire group. The efforts made by the bank in this regard will be taken into
account while carrying out the supervisory review and evaluation process under Pillar
II.

Banks will also have an option to follow the Alternative Standardised Approach
(ASA) as detailed in para 2 below.

1. THE STANDARDISED APPROACH

1.1 In TSA, 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. The business lines are
defined in detail in Appendix 1. It is possible that some of these business lines are
not being pursued by banks in India departmentally, but are being undertaken
through subsidiaries. In such cases, these would be completely omitted from the
bank’s operational risk capital charge calculations on solo basis, but included in the
assessment of group-wide operational risk capital charge.

1.2 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
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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-β)
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 TSA 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. However, the sum of the gross income of eight
business lines should be equal to the gross income of the institution.

1.3 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. For this purpose, the year will be determined as explained in the example
at the end of this para. 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. The total capital charge will be expressed as:

KTSA = {∑years 1-3 max[∑(GI1-8 X β1-8),0]}/3

Where,

KTSA = the capital charge under TSA

GI1-8 = annual gross income in a given year, as defined in the Basic Indicator
Approach, for each of the eight business lines ( Please see Appendix 2)

β 1-8 = a fixed percentage, set by the Basel Committee, relating the level of required
capital to the level of the gross income for each of the eight business lines.
The values of beta are detailed below:

The value of the betas for TSA

S.No Business Line β Factors
1 Corporate finance (β1) 18%
2 Trading and sales(β2) 18%
3 Payment and settlement(β3) 18%
4 Agency services(β4) 15%
5 Asset management(β5) 12%
6 Retail brokerage(β6) 12%
7 Retail banking(β7) 12%
8 Commercial banking(β8) 15%

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A bank should calculate its annual gross income for the most recent year by
aggregating the gross income for the particular business line for the last four financial
quarters. A bank should calculate its annual gross income for the two years
preceding the most recent year in the same manner.

Example
For a bank calculating its Operational Risk Weighted Assets as at end November
2010, the annual gross income of a particular business line for the previous three
years should be calculated as follows:

Year 3 Year 2 Year 1

Gross Income for September 2010(GI3a) September 2009(GI2a)  September 2008(GI1a) 
Financial quarter
ending June 2010(GI3b) June 2009(GI2b)  June 2008(GI1b) 

March 2010(GI3c) March 2009(GI2c)  March 2008(GI1c) 

December 2009(GI3d) December 2008(GI2d)  December 2007(GI1d) 

Total GI3 = GI3a + GI3b + GI2 = GI2a + GI2b + GI1 = GI1a + GI1b +
GI3c + GI3d GI2c + GI2d GI1c + GI1d

Where,
GI = Gross income

If for any reason, the GI figure for the preceding quarter is not available, the bank can
calculate its annual gross income for the most recent year by aggregating the gross
income of the last to last four financial quarters. A bank should calculate its annual
gross income for the two years preceding the most recent year in the same manner.
For instance, while calculating Operational Risk Weighted Assets at the end of April
2011, if March 2011 figures are not available, the GI for the 4 quarters – Quarter
ended March 2010 to quarter ended December 2010 - could be used to compute GI
for year 3.

1.4 QUALIFYING CRITERIA FOR ADOPTING TSA

In order to qualify for use of TSA, a bank must satisfy RBI that at a minimum, it meets
the requirements given in paras 1.4.1 to 1.4.3.

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1.4.1 Board of Directors and Senior Management Oversight

The board of directors and senior management of bank should be actively involved in
the oversight of the operational risk management framework. There must be regular
reporting of operational risk exposures, including material operational losses, to
business unit management, senior management, and to the board of directors. For
this purpose operational risk exposures would mean the trends in operational losses
observed during last few years in each business line and the bank’s perception of
likely operational losses in the near future given its internal controls. The bank must
have procedures for taking appropriate action according to the information contained
in the management reports.

1.4.2 Quality of Operational Risk Management System

1.4.2.1 The bank should have an operational risk management system that is
conceptually sound and is implemented with integrity. The operational risk
management function is responsible for developing strategies to identify, assess,
monitor and control/mitigate operational risk; for codifying firm-level policies and
procedures concerning operational risk management and controls; for the design and
implementation of the firm’s operational risk assessment methodology; and for the
design and implementation of a risk-reporting system for operational risk.

1.4.2.2 As part of the bank’s internal operational risk assessment system, the bank
must systematically track relevant operational risk data including material losses by
business line. In order to qualify for TSA, a bank should meet the following
requirements regarding collection of operational loss data:

(i) The bank should have collected operational loss data for different business
lines at least for one year and reviewed it at the level of Board at least
during last six months.

(ii) The bank's internal loss data must be comprehensive in that it captures all
material activities and exposures from all appropriate sub-systems and
geographic locations. A bank must be able to justify that any activity and
exposure excluded would not have a significant impact on the overall risk
estimates.

(iii) Bank may have an appropriate de minimis gross loss threshold for internal
loss data collection, say Rs.10, 000. The appropriate threshold may vary
somewhat among banks and within a bank across business lines and / or
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event types. Measuring operational risk requires both estimating the

probability of an operational loss event and the severity of the loss and the
choice of the threshold could affect the shape of the loss distribution and
estimates of both expected and unexpected operational losses. Therefore,
the threshold fixed by the bank may be broadly consistent with those used
by the peer banks and it should be fixed in such a way that the bank
collects detailed information relating to at least top 95% of the operational
losses of the bank. Besides, banks are encouraged to have break-up of
operational loss data into seven loss events within each business line, as
given in Appendix 3. This would facilitate transition to the Advanced
Measurement Approach by the bank in due course.

1.4.2.3 The bank’s operational risk assessment system must be closely integrated
into the risk management processes of the bank. Its output must be an integral part
of the process of monitoring and controlling the bank’s operational risk profile. For
instance, this information must play a prominent role in risk reporting, management
reporting, and risk analysis. The bank must have techniques for creating incentives to
improve the management of operational risk throughout the firm. The bank’s
operational risk management system must be well documented. The bank must have
a routine in place for ensuring compliance with a documented set of internal policies,
controls and procedures concerning the operational risk management system, which
must include policies for the treatment of non compliance issues.

1.4.2.4 The bank’s operational risk management processes and assessment system
must be subject to validation and regular independent review which can be carried
out by its internal audit department at least annually. These reviews must include
both the activities of the business units and of the operational risk management
function.

1.4.2.5 The bank’s operational risk assessment system (including the internal
validation processes) must be subject to regular review by external auditors
(including statutory auditors) and/or supervisors. While engaging external auditing
firms for this purpose, banks should look at their experience in the area, the present
capabilities to carry out validations/review and the market reputation.

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1.4.2.6 The bank must develop specific policies and have documented criteria for
mapping gross income for current business lines and activities into the standardized
framework. The criteria must be reviewed and adjusted for new or changing business
activities as appropriate. The bank may get guided by the principles of business line
mapping set out in Appendix 4.

1.4.2.7 Banks using TSA should also comply with the guidance on management of
operational risk contained in RBI circular No. RBI/2005-06/180 DBOD.No.BP.BC.39/
21.04.118/2004-05 dated October 14, 2005.

1.4.3 Allocation of Sufficient Resources

The bank should have sufficient resources (technical/physical and human) in the use
of the approach in the major business lines as well as the control and audit areas.

1.5 VERIFICATION BY RBI

A bank may adopt the TSA/ASA (detailed below) once it satisfies RBI that the
aforesaid qualifying criteria are met by the bank. On receipt of application from the
bank, along with supporting documents, for migrating to TSA/ASA, RBI will inter alia
examine the compliance to various requirements contained in these guidelines. Such
an evaluation would inter alia comprise the following elements:

• Documentation of the mapping process,

• Description of the mapping criteria,
• Explanation of the mapping of new types of activities,
• Structure of responsibilities and reporting,
• Description of the risk management process for operational risk, and
• Integrity of the operational risk loss data for each business line.

2. THE ALTERNATIVE STANDARDISED APPROACH

2.1 The ASA is a special variant of TSA. A bank can use the ASA provided the bank
is able to satisfy RBI that this alternative approach provides an improved basis for
risk management. Once a bank has been allowed to use the ASA, it will not be
allowed to revert to use of TSA without the permission of RBI.

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2.2 Under the ASA, the operational risk capital charge/methodology is the same as
for TSA except for two business lines — retail banking and commercial banking. For
these business lines, loans and advances — multiplied by a fixed factor ‘m’ —
replaces gross income as the exposure indicator. The betas for retail and commercial
banking are unchanged from TSA.

For instance, the ASA operational risk capital charge for retail banking can be
expressed as:

KRB = B7 x m x LARB
where
KRB = the capital charge for the retail banking business line
B7 B = the beta for the retail banking business line
LARB = total outstanding retail loans and advances (non-risk weighted and gross
of provisions), averaged over the past 12 quarters identified in the
manner explained in the example given in para 1.3 above; and

m = the fixed factor 0.035.

Overall capital charge under ASA will be calculated as under:

KASA = {Σyears 1-3 max[Σ(GI1-6 x β1-6),0]} /3 + (β7 x m x LARB) + (β8 x m x LAcB)

Where

LARB = total outstanding retail loans and advances (non-risk weighted and gross
of provisions), averaged over the past 12 quarters identified in the
manner explained in the example given in para 1.3 above; and

LACB = total outstanding commercial banking loans and advances (non-risk

weighted and gross of provisions), averaged over the past 12 quarters
identified in the manner explained in the example given in para 1.3
above; and

m = 0.035 (for both retail and commercial banking)

2.3 For the purposes of the ASA, total loans and advances in the retail banking
business line consists of the total drawn amounts in the following credit portfolios:
retail, SMEs treated as retail, and purchased retail receivables. For commercial
banking, total loans and advances consists of the drawn amounts in the following
credit portfolios: corporate, sovereign, bank, specialised lending, SMEs treated as
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corporate and purchased corporate receivables. The book value of securities held for
the purpose of interest income such as in HTM and AFS should also be included.

2.4 Under the ASA, banks may aggregate retail and commercial banking (if they wish
to) using a beta of 15%. Similarly, those banks that are unable to disaggregate their
gross income into the other six business lines can aggregate the total gross income
for these six business lines using a beta of 18%. As under TSA, the total capital
charge for the ASA is calculated as the simple summation of the regulatory capital
charges across each of the eight business lines.

2.5 QUALIFYING CRITERIA

In addition to the general requirements for applying the standardized approach, a

bank opting for ASA should also satisfy the following additional criteria:

• The bank must be overwhelmingly active in retail and/or commercial banking

activities, which must account for at least 90% of its income indicator; and

• The bank must be able to demonstrate that a significant proportion of its retail
and/or commercial banking activities comprise loans associated with a high
probability of default, and that the alternative standardised approach provides
an improved basis for assessing the operational risk.
 

3. CALCULATION OF CAPITAL CHARGE FOR OPERATIONAL RISK

3.1 Once the bank has calculated the capital charge for operational risk under
TSA/ASA, it has to multiply this with (100÷9) and arrive at the notional risk weighted
asset (RWA) for operational risk.

3.2 The RWA for operational risk will be aggregated with the RWA for the credit risk
and the minimum capital requirement (Tier 1 and Tier 2) for credit and operational
risk will be calculated. The available surplus eligible capital (as described in our
Master Circular on New Capital Adequacy Framework - NCAF) should be sufficient to
meet the capital requirement for market risk.

3.3 The total of eligible capital (Tier 1 and Tier 2) will be divided by the total RWA
(credit risk + operational risk + market risk) to compute CRAR for the bank as a
whole.

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Appendix 1

Mapping of Business Lines

Level 1 Level 2 Activity Groups

Corporate Finance
Mergers and acquisitions, underwriting, privatisations, securitisation, research,
debt (government, high yield), equity, syndications, IPO, secondary private
placements
Government Finance
Corporate
Note: The Gross Income arising from advisory, on-balance sheet and off-
Finance
balance sheet activities of banks connected with the above areas would be
Merchant Banking
reckoned under this business line. GI related to financial assistance extended
for mergers and acquisitions, wherever permitted as per existing RBI
Advisory Services guidelines, will be reported here.

Sales Fixed income, equity, foreign exchanges, credit products, funding, own position
securities, lending and repos, brokerage, debt, prime brokerage and sale of
Market Making
Government bonds to retail investors.
Trading & Proprietary Positions
Sales Note: GI from cross-selling of various products of the subsidiaries of the bank
or other financial institutions, income from derivatives transactions, call money
Treasury
lending transactions, short sale of securities, purchase and sale of foreign
currency, should also be reported here.

Payment and External Clients Payments and collections, inter-bank funds transfer (RTGS,NEFT,EFT,ECS etc.),
Settlement* clearing and settlement
Custody Escrow, securities lending (customers) corporate actions, depository services
Agency
Services Corporate Agency Issuer and paying agents
Corporate Trust Debenture trustee

Discretionary Fund
Pooled, segregated, retail, institutional, closed, open, private equity
Management
Asset
Management
Non-Discretionary
Pooled, segregated, retail, institutional, closed, open
Fund Management

Retail
Retail Brokerage# Execution and full service
Brokerage

Retail lending including trade finance, cash credit etc. as defined in the
guidelines on New Capital Adequacy Framework issued by RBI and also
Retail Banking Retail Banking
covering non fund based, bill of exchange and export and import finance
facilities to retail customers, housing loans, loans against shares, banking
services, trust and estates, retail deposits@, intra bank fund transfer on behalf
Private lending (personal loans) and private(institutional) deposits @, banking
Private Banking
services, trust and estates, investment advice

Card Services Merchant/commercial/corporate cards, private labels and retail

Commercial Project finance, corporate loans, cash credit loans, real estate, export and import
Banking Commercial Banking finance, trade finance, factoring, leasing, lending, guarantees including deferred
payment and performance guarantees, LCs, bills of exchange, take-out
finance, interbank lending other than in call money and notice money market.

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* Payment and settlement losses related to a bank’s own activities would be incorporated in the loss experience of the
affected business line.

#  The Indian retail brokerage industry consists of companies that primarily act as agents for the buying and selling of securities
(e.g. stocks, shares, and similar financial instruments) on a commission or transaction fee basis.

@ To calculate net interest income for retail banking/private banking/commercial banking, a bank may take the interest earned
on its loans and advances to retail customers/private banking customers/commercial banking cutomers less the weighted
average cost of funding of the loans (from whatever source).

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Appendix 2

Definition of Gross Income

1. Gross income is defined as "Net interest income" plus "net non-interest income". It
is intended that this measure should:

i) be gross of any provisions (e.g. for unpaid interest) and write-offs made
during the year;

ii) be gross of operating expenses, including fees paid to outsourcing

service providers, in addition to fees paid for services that are outsourced,
fees received by banks that provide outsourcing services shall be included
in the definition of gross income;

iii) exclude reversal during the year in respect of provisions and write-offs
made during the previous year(s);

iv) exclude income recognised from the disposal of items of movable and
immovable property;

v) exclude realised profits / losses from the sale of securities in the "held
to maturity" category;

vi) exclude income from legal settlements in favour of the bank;

vii) exclude other extraordinary or irregular items of income and

expenditure; and

viii) exclude income derived from insurance activities (i.e. income derived
by writing insurance policies) and insurance claims in favour of the bank.

2. The above definition is summarized in the following equation:

Gross Income = Net profit (+) Provisions & contingencies (+) Operating
expenses (Schedule 16 of Balance Sheet) (-) items (iii) to (viii) of para 1
above.

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Appendix 3

Detailed Loss Event Type Classification

Event-Type Definition Categories Activity Examples

Category (Level 1) (Level 2) (Level 3)

Internal fraud Losses due to acts of a type intended Unauthorised Activity Transactions not reported (intentional)
to defraud, misappropriate property
or circumvent regulations, the law or
company policy, excluding diversity/ Transaction type unauthorised (with monetary
discrimination events, which involves loss)
at least one internal party
Mismarking of position (intentional)
Theft and Fraud Fraud / credit fraud / worthless deposits

Theft / extortion / embezzlement / robbery

Misappropriation of assets

Malicious destruction of assets

Forgery
Kite flying

Smuggling

Account take-over / impersonation / etc.

Tax non-compliance / evasion (wilful)
Bribes / kickbacks
Insider trading (not on firm’s account)
External fraud Losses due to acts of a type intended Theft and Fraud Theft/Robbery
to defraud, misappropriate property or
circumvent the law, by a third party
Forgery
Kite flying
Systems Security Hacking damage

Theft of information (with monetary loss)

Employment Losses arising from acts Employee Relations Compensation, benefit, termination issues
Practices and inconsistent with employment,
Workplace health or safety laws or agreements,
Organised labour activity
Safety from payment of personal injury
claims, or from diversity / Safe Environment General liability (slips and falls, etc.)
discrimination events

Employee health & safety rules events

Workers compensation
Diversity & All discrimination types
Discrimination

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Event-Type Category Categories Activity Examples (Level 3)

(Level 1) Definition (Level 2)

Clients, Products Losses arising from an Suitability, Disclosure & Fiduciary breaches / guideline violations
& Business unintentional or negligent Fiduciary
Practices failure to meet a professional Suitability / disclosure issues (KYC, etc.)
obligation to specific clients
(including fiduciary and
suitability requirements), or Retail customer disclosure violations
from the nature or design of Breach of privacy
a product.
Aggressive sales
Account churning

Misuse of confidential information

Lender liability
Improper Business or Antitrust
Market Practices

Improper trade / market practices

Market manipulation
Insider trading (on firm’s account)
Unlicensed activity
Money laundering
Product Flaws Product defects (unauthorised, etc.)

Model errors
Selection, Sponsorship Failure to investigate client per guidelines
& Exposure
Exceeding client exposure limits
Advisory Activities Disputes over performance of advisory activities

Damage to Physical Losses arising from loss Disasters and other Natural disaster losses
Assets or damage to physical events
assets from natural
Human losses from external sources (terrorism, vandalism)
disaster or other events.

Business disruption Losses arising from disruption Systems Hardware

and system failures of business or system failures
Software
Telecommunications

Utility outage / disruptions

Execution, Delivery Losses from failed transaction Transaction Capture, Miscommunication
& Process processing or process Execution &
Management management, from relations Maintenance
Data entry, maintenance or loading error
with trade counterparties and
vendors Missed deadline or responsibility
Model / system misoperation

Accounting error / entity attribution error

Other task mis-performance

Delivery failure

Collateral management failure

Reference Data Maintenance

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Monitoring and Failed mandatory reporting obligation

Reporting

Inaccurate external report (loss incurred)

Customer Intake and Client permissions / disclaimers missing

Documentation

Legal documents missing / incomplete

Customer / Client Unapproved access given to accounts

Account Management

Incorrect client records (loss incurred)

Negligent loss or damage of client assets

Trade Counterparties Non-client counterparty misperformance

Misc. non-client counterparty disputes

Vendors & Suppliers Outsourcing

Vendor disputes

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Appendix 4

Principles for Business Line Mapping

(a) All activities must be mapped into the eight level 1 business lines in a
mutually exclusive and jointly exhaustive manner.

(b) Any banking or non-banking activity which cannot be readily mapped into
the business line framework, but which represents an ancillary function to an
activity included in the framework, must be allocated to the business line it
supports. If more than one business line is supported through the ancillary
activity, an objective mapping criteria must be used.

(c) When mapping gross income, if an activity cannot be mapped into a

particular business line then the business line yielding the highest charge
must be used. The same business line equally applies to any associated
ancillary activity.

(d) Banks may use internal pricing methods to allocate gross income between
business lines provided that total gross income for the bank (as would be
recorded under the Basic Indicator Approach) still equals the sum of gross
income for the eight business lines.

(e) The mapping of activities into business lines for operational risk capital
purposes must be consistent with the definitions of business lines used for
regulatory capital calculations in other risk categories, i.e. credit and market
risk. Any deviations from this principle must be clearly motivated and
documented.

(f) The mapping process used must be clearly documented. In particular,

written business line definitions must be clear and detailed enough to allow
third parties to replicate the business line mapping. Documentation must,
among other things, clearly motivate any exceptions or overrides and be
kept on record.
(g) Processes must be in place to define the mapping of any new activities or
products.
(h) Senior management is responsible for the mapping policy (which is subject
to the approval by the board of directors).
(i) The mapping process to business lines must be subject to independent
review.

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Supplementary Business Line Mapping Guidelines

There are a variety of valid approaches that banks can use to map their activities to
the eight business lines, provided the approach used meets the business line
mapping principles. The following is an example of one possible approach that
could be used by a bank to map its gross income:

1. Gross income for retail banking consists of net interest income on loans and
advances to retail customers and SMEs treated as retail, plus fees related to
traditional retail activities, net income from swaps and derivatives held to hedge
the retail banking book, and income on purchased retail receivables. To
calculate net interest income for retail banking, a bank takes the interest
earned on its loans and advances to retail customers less the weighted
average cost of funding of the loans (from whatever source).

2. Similarly, gross income for commercial banking consists of the net interest
income on loans and advances to corporate (plus SMEs treated as corporate),
interbank and sovereign customers and income on purchased corporate
receivables, plus fees related to traditional commercial banking activities
including commitments, guarantees, bills of exchange, net income (e.g. from
coupons and dividends) on securities held in the banking book, and
profits/losses on swaps and derivatives held to hedge the commercial banking
book. Again, the calculation of net interest income is based on interest earned
on loans and advances to corporate, interbank and sovereign customers less
the weighted average cost of funding for these loans (from whatever source).

3. For trading and sales, gross income consists of profits/losses on instruments

held for trading purposes (i.e. in the mark-to-market book), net of funding cost,
plus fees from wholesale broking.

4. For the other five business lines, gross income consists primarily of the net
fees/commissions earned in each of these businesses. Payment and
settlement consists of fees to cover provision of payment/settlement facilities
for wholesale counterparties. Asset management is management of assets on
behalf of others.

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