Consultative document on Standardised Measurement Approach (SMA) for operational risk

Basel Committee on Banking Supervision

One of the main priorities of the Basel Committee is to establish consistency in the application of global bank standards as it will improve the resilience of the global banking system, promote public confidence in regulatory capital ratios and encourage a level playing field for internationally active banks.
In this regard, in October 2014 the BCBS published for consultation a revised Standardised Approach for operational risk that sought to address weaknesses in the existing standardised approaches. In the light of this revision, the BCBS has decided to standardise the estimation of regulatory capital for the entire operational risk framework and it has therefore determined that the withdrawal of internal modelling approaches for operational risk regulatory capital from the Basel framework is warranted.

  • Building on these decisions, the BCBS has published a consultative document which develops the Standardised Measurement Approach (SMA) and provides a single non-model-based method for the estimation of operational risk capital.
  • The proposed approach combines the main elements of the previously consulted standardised approach (e.g. the Business Indicator substitutes the Gross Income as the proxy indicator for operational risk exposure) with bank’s internal loss experience, which was a key component of the Advanced Measurement Approach (AMA).
  • During the course of 2016, the BCBS will provide further details on the timeline for the withdrawal of the AMA, and the implementation of the SMA.

The technical note prepared by Management Solutions’ R&D department analyses the new standardised framework for operational risk proposed by the BCBS and gives detail on the main components necessary for the SMA’s calculation.

Executive summary

The revised operational risk framework establishes the implementation of the Standardised Measurement Approach and the withdrawal of the AMA although the timeline has not been set.

Scope of application:

  • This consultation document applies to internationally active banks on a consolidated basis and supervisors could apply the SMA framework to non-internationally active institutions.

Prior regulation:

  • SMA for operational risk: the revised operational risk framework will be based on the Standardised Measurement Approach (SMA) which is a single non-model-based method for estimating the operational risk capital.
  • Business indicator (BI): banks have to calculate their BI which is made up of almost the same P&L items that are founded in the composition of the Gross Income (GI), although the BI uses positive value of its components.
  • BI component: banks are divided into 5 buckets according to the size of their BI. Each bucket has an associated increasing function of the BI.
  • Loss component: is based on annual losses. It distinguishes between loss events above €10 million and €100 million and, in general terms, it uses10 years of good-quality loss data.
  • Internal Loss Multiplier: Ln (exp(1) – 1 + (loss component / BI component)).
  • SMA requirement: for banks in bucket 1: it corresponds solely to the BI component whereas for banks in buckets 2-5: it results from multiplying the BI component by the internal loss multiplier.

Download the technical note by clicking here