Basel Committee issues proposed revisions to the operational risk capital framework

04 March 2016

The Basel Committee has issued for consultation proposed revisions to the operational risk capital framework. The new SMA for operational risk builds on the Committee's earlier consultation paper issued in October 2014.

The proposed revisions to the operational risk capital framework are part of the Committee's broad objective of balancing simplicity, comparability and risk sensitivity. The Standardised Measurement Approach (SMA) addresses a number of weaknesses in the current framework. In particular:

• The SMA will replace the three existing standardised approaches for calculating operational risk capital as well as the Advanced Measurement Approach (AMA), thus significantly simplifying the regulatory framework;
• The revised methodology combines a financial statement-based measure of operational risk - the "Business Indicator" (BI) - with an individual firm's past operational losses. This results in a risk-sensitive framework, while also promoting consistency in the calculation of operational risk capital requirements across banks and jurisdictions; and
• The option to use an internal model-based approach for measuring operational risk - the "Advanced Measurement Approaches" (AMA) - has been removed from the operational risk framework. The Committee believes that modelling of operational risk for regulatory capital purposes is unduly complex and that the AMA has resulted in excessive variability in risk-weighted assets and insufficient levels of capital for some banks.

"The proposals are an important step towards completing the post-crisis reforms during the current year," said Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank. He noted the Committee's plans to conduct a quantitative impact study (QIS) to help inform the final calibration of the proposed standard and added: "For most banks, the Committee expects that these proposals will have a relatively neutral impact on capital. While the objective of these proposals is not to significantly increase overall capital requirements, it is inevitable that minimum capital requirements will increase for some banks."

Comments on the proposals should be uploaded by Friday 3 June 2016.

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