Emerging Practices for Capital Adequacy © Copyright 2003, CCRO. All rights reserved. 41 are not adequately reflected in a single metric like gross margin or net income. This method can result in either the under- or over-estimation of capital. • Basic Indicator Approach The basic indicator approach requires financial institutions to hold capital for operational risk equal to a fixed percentage of gross income. Income Gross K BIA  = 15 where: = BIA K Capital charge under the basic indicator approach =  A fixed percentage Coming up with alphas is almost impossible for the CCRO and especially difficult to enforce. That said, the approach has merit at least in that if a multiplier must be used it is preferable to segregate the metrics based on business units so more applicable measures may be used. Utilizing this approach would probably require a regulator to provide enforcement. • Advanced Measurement Approach (AMA) - Implementation of the AMA in the near term will be difficult if not impossible. Reliability of models is hampered by poor data. This approach is more appropriate for energy and banking, although only a very few companies in the banking industry have adopted this more sophisticated approach. It is generally preferable to move in this direction, considering that much of operations risk requires AMA. Because of its difference from banking, the energy industry requires further thought when quantifying operational risk. Measurement techniques, especially the more simplistic, may be suitable for the banks but do not perform as well when applied to energy where real assets are involved. With no generally accepted and utilized framework for operational risk in the energy industry, the CCRO recommends developing one that considers the experiences of the banking and insurance industries but is expanded and adapted accordingly for the energy industry. With an industry-led process, rather than a process where the industry in consulted, the opportunity exists to create a practical and meaningful operational risk framework. 15 Gross Income = Net Interest Income + Net Non-interest Income [comprising (1) fees and commissions receivable less fees and commissions payable, (2) the net result on financial operations, and (3) other income. This excludes extraordinary or irregular items]. This measure is intended to reflect income before deduction of operational losses.