V. Operational
Risk
A.
Definition of operational
risk
644.
Operational risk is defined as the risk of loss
resulting from inadequate or
failed
internal
processes, people and systems or from external
events. This definition includes
legal
risk,
(97) but
excludes strategic and reputational
risk.
(97) Legal risk includes, but is
not limited to, exposure to fines, penalties, or
punitive damages resulting from supervisory
actions, as well as private
settlements.
B. The
measurement
methodologies
645.
The framework outlined below presents three
methods for calculating
operational
risk
capital charges in a continuum of increasing
sophistication and risk sensitivity:
(i)
the Basic Indicator Approach;
(ii)
the Standardised Approach; and
(iii)
Advanced Measurement Approaches
(AMA).
646.
Banks are encouraged to move along the spectrum
of available approaches as they
develop
more sophisticated operational risk measurement
systems and practices.
Qualifying
criteria
for the Standardised Approach and AMA are
presented below.
647.
Internationally active banks and banks with
significant operational risk
exposures
(for
example, specialised processing banks) are
expected to use an approach that is
more
sophisticated
than the Basic Indicator Approach and that is
appropriate for the risk profile
of
the
institution.
(98) A
bank will be permitted to use the Basic
Indicator or Standardised
Approach
for some parts of its operations and an AMA for
others provided certain minimum criteria are
met, see paragraphs 680 to
683.
(98) Supervisors will review the
capital requirement produced by the operational
risk approach used by a bank (whether Basic
Indicator Approach, Standardised Approach or
AMA) for general credibility, especially in
relation to a firm’s peers. In the event that
credibility is lacking, appropriate supervisory
action under Pillar 2 will be
considered.
648.
A bank will not be allowed to choose to revert
to a simpler approach once it
has
been
approved for a more advanced approach without
supervisory approval. However, if
a
supervisor
determines that a bank using a more advanced
approach no longer meets the
qualifying
criteria for this approach, it may require the
bank to revert to a simpler
approach
for
some or all of its operations, until it meets
the conditions specified by the supervisor
for
returning
to a more advanced approach.
1. The
Basic Indicator
Approach
649.
Banks using the Basic Indicator Approach must
hold capital for operational
risk
equal
to the average over the previous three years of
a fixed percentage (denoted alpha)
of
positive
annual gross income. Figures for any year in
which annual gross income is
negative
or
zero should be excluded from both the numerator
and denominator when calculating
the
average.
(99) The
charge may be expressed as
follows:
where:
KBIA
= the
capital charge under the Basic Indicator
Approach
GI
= annual gross income, where positive, over the
previous three years
N =
number of the previous three years for which
gross income is positive
α
=
15%, which is set by the Committee, relating the
industry wide level of
required
capital to the industry wide level of the
indicator.
(99) If negative gross income
distorts a bank’s Pillar 1 capital charge,
supervisors will consider appropriate
supervisory action under Pillar
2.
650. Gross income is
defined as net interest income plus net
non-interest
income.
(100) It
is
intended
that 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 service
providers;
(101)
(iii) exclude
realised profits/losses from the sale of
securities in the banking
book;
(102) and
(iv)
exclude extraordinary or irregular items as well
as income derived from
insurance.
(100) As defined by national
supervisors and/or national accounting
standards.
(101) In contrast 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.
(102) Realised profits/losses from
securities classified as “held to maturity” and
“available for sale”, which typically constitute
items of the banking book (e.g. under certain
accounting standards), are also excluded from
the definition of gross
income.
651.
As a point of entry for capital calculation, no
specific criteria for use of the
Basic
Indicator
Approach are set out in this Framework.
Nevertheless, banks using this
approach
are encouraged to
comply with the Committee’s guidance on
Sound
Practices for the
Management and
Supervision of Operational
Risk, February
2003.
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