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In March 2016, the Basel Committee published a draft of a new framework for determining capital requirements for operational risk (OpRisk). The new framework replaces all existing approaches for determining the capital requirement with a single non-model-based measurement approach (Standardised Measurement Approach, SMA) and thus abolishes the model-based Advanced Measurement Approach (AMA). The main motive for introducing a single capital approach was to improve the comparability of results across institutions and to address weaknesses in the previous approaches without calling into question the overall framework in Pillar 1. According to the Basel Committee, the calculation and implementation should be comparatively simple and suitable for institutions of different sizes and complexity.

According to the new approach, the calculation of a new business indicator is carried out additively from an interest component, a service component and a financial component. Special rules are foreseen for banks with a high interest margin as well as for banks that generate the majority of their income from commissions. All of the above components are calculated as a 3-year average, which leads to dampening effects over time. In addition to the business indicator, a loss component is defined for large institutions to increase risk sensitivity, which results in a multiplier for internal losses (internal loss multiplier, ILM). The regulatory capital is essentially the product of the business indicator component and the internal loss multiplier. With regard to the qualitative minimum requirements for loss data collection under Pillar 1, the draft includes a number of criteria dealing with the robustness of corresponding processes and data quality or integrity.

However, recent developments from the Basel Committee indicate various changes to the consulted calculation logic. The outcome of the Basel Committee negotiations should therefore be awaited. In Europe, implementation will probably only take place within the framework of CRR III, whose consultation has not yet started.

For medium-sized banks, the question arises as to whether all the necessary data is available in the required granularity, while large banks must expect increased capital requirements after the abolition of their own calculation models and as a result of the progression in the determination of the new business indicator.

We recommend conducting a quantitative impact analysis to estimate the capital effects. Furthermore, the effects on Pillar 2 (risk-bearing capacity) should be reviewed: if necessary, a realignment of economic capital models for operational risks is required. It should also be considered whether an adjustment of loss data collection methods and processes as well as risk management measures are necessary.

Newsletter Operational Risks (in German only)

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