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Review of the Standard methods for operational risk

Basel Committee on Banking Supervision

As a result of its ongoing work in search of a suitable framework for operational risk, the BCBS published a paper introducing a revised method for calculating capital requirements for operational risk.
The BCBS reviewed the adequacy of the capital requirements for operational risk framework, not only to identify weaknesses brought to light as a result of crisis, but also to determine the degree of implementation of the operational risk framework since 2004.

The financial crisis showed that the methods for calculating capital requirements for operational risk – BIA, TSA and ASA, did not consider this risk properly, mainly due to the inadequacy of the Gross Income Indicator as a proxy for operational risk.

In the BCBS consultative document Operational risk - Revisions to the simpler Approaches, published in October 2014, the BCBS introduced the revised SA method that entities would have to start using. It replaced the Gross Income Indicator as an indirect indicator of operational risk by the Business Indicator, and calibrated the regulatory ratios to be applied.

In October 2014 the BCBS also published the Review of the Principles for the Sound Management of Operational Risk, which analyzes the degree of implementation of the principles for robust operational risk management that had been issued by the BCBS in June 2011.

The main conclusion reached by the BCBS in this review is that, overall, credit institutions had made insufficient progress in implementing the principles of operational risk management. In this respect, the BCBS made a number of recommendations to entities to facilitate the implementation of the principles proposed.

Below is an executive summary as well as the main implications the implementation of this framework will have on financial institutions.

Executive summary

The BCBS identified weaknesses in the way banks implemented the regulatory framework for operational risk and made recommendations to entities to remedy the situation.

 

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