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:
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:
the Basic Indicator Approach
the Standardised Approach, and
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.
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.
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
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