Basel Committee newsletter No. 7

22 November 2005

The Basel Committee released a newsletter to set forth the views of the Operational Risk Subgroup (AIGOR) of the Basel Committee Accord Implementation Group regarding the treatment of expected operational risk losses in Advanced Measurement Approaches (AMA). The letter responses to requests from the industry for clarification on this issue, particularly with respect to the meaning of paragraph 669(b) which states that a bank may be allowed to base its operational risk capital calculations on unexpected losses alone only if the bank can demonstrate that it is adequately “capturing EL in its business practices”.

More specifically, the bank must “demonstrate to the satisfaction of its national supervisor that it has measured and accounted for its expected loss (EL) exposure”. The AIGOR believes that further clarification of paragraph 669(b) could provide greater consistency in the implementation of the AMA.

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