CRD IV: Operational Risk Capital Calculation
Produced in partnership with Steven Hall and Nicholas Mead of KPMG
CRD IV: Operational Risk Capital Calculation

The following Financial Services guidance note Produced in partnership with Steven Hall and Nicholas Mead of KPMG provides comprehensive and up to date legal information covering:

  • CRD IV: Operational Risk Capital Calculation
  • Introduction and background
  • Rationale for change to simpler approaches
  • Other operational risk changes
  • Timelines
  • The proposed Revised Standardised Approach (RSA)
  • Possible impacts and implications of the proposed revisions

Introduction and background

The Basel II Accord recognised that operational risk is a major source of actual and potential exposure for banks and identified three approaches for measuring and managing operational risk:

  1. the Basic Indicator Approach

  2. the Standardised Approach, and

  3. the Advanced Measurement Approach

Each approach has features which introduce increasing levels of sophistication and risk-sensitivity. Internationally active banks and banks with significant operational risk exposures were expected to use an approach that is more sophisticated and that is appropriate for the risk profile of the institution. Banks are encouraged to move along the spectrum of available approaches as they develop more sophisticated operational risk measurement systems and practices.

The Basic Indicator Approach

Under the Basic Indicator Approach (BIA), banks are required to hold capital for operational risk equal to the average over the previous three years of a fixed percentage (15%) of positive annual gross income (GI). This is expressed in the equation below, where n = number of years that GI is positive over the last three years and α = 15%. Where the GI for a year is negative, it is excluded from the numerator and denominator.

$1

The Standardised Approach

The Standardised Approach (SA) is simply an extension to the BIA that allows banks to divide its activities into eight business lines and apply a