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Basel ii Accord
Sections 652 to
663 |
2. The Standardised
Approach (103),
(104)
652.
In the Standardised Approach, 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 Annex 8.
653.
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 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) 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 the
Standardised Approach 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.
(103) The Committee intends to
reconsider the calibration of the Basic
Indicator and Standardised Approaches when more
risk-sensitive data are available to carry out
this recalibration. Any such recalibration would
not be intended to affect significantly the
overall calibration of the operational risk
component of the Pillar 1 capital
charge.
(104) The Alternative Standardised
Approach At national supervisory
discretion a supervisor can choose to allow a
bank to use the Alternative Standardised
Approach (ASA) provided the bank is able to
satisfy its supervisor that this alternative
approach provides an improved basis by, for
example, avoiding double counting of risks.
Once a bank has been allowed to
use the ASA, it will not be allowed to revert to
use of the Standardised Approach without the
permission of its supervisor. It is not
envisaged that large diversified banks in major
markets would use the
ASA.
Under the ASA, the operational
risk capital charge/methodology is the same as
for the Standardised Approach except for two
business lines — retail banking and commercial
banking. For these business lines, loans
andadvances — multiplied by a fixed factor ‘m’ —
replaces gross income as the exposure indicator.
The betas for retail and
commercial banking are unchanged from the
Standardised Approach. The ASA operational risk
capital charge for retail banking (with the same
basic formula for commercial banking) can be
expressed as:
where
KRB is the capital charge for the
retail banking business
line
βRB is the beta for
the retail banking business
line
LARB is total outstanding retail
loans and advances (non-risk weighted and gross
of provisions), averaged over the past three
years
m is 0.035
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 corporate and purchased corporate
receivables.
The book value of securities held
in the banking book should also be
included.
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%, with negative gross
income treated as described in paragraph
654.
As under the Standardised
Approach, 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.
654.
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.
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.105
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.106 The total capital
charge
may be expressed
as:
where:
(105) At national discretion,
supervisors may adopt a more conservative
treatment of negative gross
income.
(106) As under the Basic Indicator
Approach, if negative gross income distorts a
bank’s Pillar 1 capital charge under the
Standardised Approach, supervisors will consider
appropriate supervisory action under Pillar
2.
3.
Advanced Measurement Approaches
(AMA)
655.
Under the AMA, the regulatory capital
requirement will equal the risk
measure
generated
by the bank’s internal operational risk
measurement system using the quantitative and
qualitative criteria for the AMA discussed
below. Use of the AMA is subject to supervisory
approval.
656.
A bank adopting the AMA may, with the approval
of its host supervisors and the
support
of its home supervisor, use an allocation
mechanism for the purpose of
determining
the
regulatory capital requirement for
internationally active banking subsidiaries that
are not
deemed
to be significant relative to the overall
banking group but are themselves subject
to
this
Framework in accordance with Part 1.
Supervisory
approval would be conditional on the bank
demonstrating to the satisfaction of the
relevant supervisors that the allocation
mechanism for these subsidiaries is appropriate
and can be supported empirically. The board of
directors and senior management of each
subsidiary are responsible for conducting their
own assessment of the subsidiary’s operational
risks and controls and ensuring the subsidiary
is adequately capitalised in respect of those
risks.
657.
Subject to supervisory approval as discussed in
paragraph 669(d), the
incorporation
of
a well-reasoned estimate of diversification
benefits may be factored in at the
group-wide
level
or at the banking subsidiary level. However, any
banking subsidiaries whose host
supervisors
determine that they must calculate stand-alone
capital requirements (see Part
1)
may
not incorporate group-wide diversification
benefits in their AMA calculations (e.g. where
an internationally active banking subsidiary is
deemed to be significant, the
banking
subsidiary
may incorporate the diversification benefits of
its own operations — those
arising
at
the sub-consolidated level — but may not
incorporate the diversification benefits of
the
parent).
658.
The appropriateness of the allocation
methodology will be reviewed
with
consideration
given to the stage of development of
risk-sensitive allocation techniques
and
the
extent to which it reflects the level of
operational risk in the legal entities and
across the
banking
group. Supervisors expect that AMA banking
groups will continue efforts to
develop
increasingly
risk-sensitive operational risk allocation
techniques, notwithstanding
initial
approval
of techniques based on gross income or other
proxies for operational risk.
659.
Banks adopting the AMA will be required to
calculate their capital requirement
using
this
approach as well as the 1988 Accord as outlined
in paragraph 46.
C.
Qualifying
criteria
1. The Standardised
Approach
(107)
660.
In order to qualify for use of the Standardised
Approach, a bank must satisfy
its
supervisor
that, at a minimum:
•
Its
board of directors and senior management, as
appropriate, are actively
involved
in
the oversight of the operational risk management
framework;
•
It
has an operational risk management system that
is conceptually sound and
is
implemented
with integrity; and
•
It
has sufficient resources in the use of the
approach in the major business lines
as
well
as the control and audit areas.
(107) Supervisors allowing banks
to use the Alternative Standardised Approach
must decide on the appropriate qualifying
criteria for that approach, as the criteria set
forth in paragraphs 662 and 663 of this section
may not be
appropriate.
661.
Supervisors will have the right to insist on a
period of initial monitoring of a
bank’s
Standardised
Approach before it is used for regulatory
capital purposes.
662.
A bank must develop specific policies and have
documented criteria for mapping
gross
income for current business lines and activities
into the standardised framework.
The
criteria
must be reviewed and adjusted for new or
changing business activities as
appropriate.
The principles for business line mapping are set
out in Annex 8.
663.
As some internationally active banks will wish
to use the Standardised Approach,
it
is
important that such banks have adequate
operational risk management
systems.
Consequently,
an internationally active bank using the
Standardised Approach must meet
the following
additional criteria:
(108)
(a)
The bank must have an operational risk
management system with clear
responsibilities
assigned to an operational risk management
function. 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.
(b)
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. Its 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 banks
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.
(c)
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. The bank must have procedures for
taking appropriate action
according
to the information within the management
reports.
(d)
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
noncompliance issues.
(e)
The bank’s operational risk management processes
and assessment system must
be
subject to validation and regular independent
review. These reviews must
include
both
the activities of the business units and of the
operational risk management
function.
(f)
The bank’s operational risk assessment system
(including the internal
validation
processes)
must be subject to regular review by external
auditors and/or
supervisors.
(108) For other banks, these
criteria are recommended, with national
discretion to impose them as
requirements.
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