Proposals to improve the operational risk capital framework released by the Basel Committee

The Basel Committee has today released for consultation a revised standardised approach for measuring operational risk capital[1]. The existing framework sets out different approaches that banks may use to calculate their operational risk capital requirement. Once finalised, a new unitary standardised approach will replace the current non-model-based approaches, which comprise the Basic Indicator Approach (BIA) and the Standardised Approach (TSA), including its variant the Alternative Standardised Approach (ASA). In addition to streamlining the framework, the new approach will address weaknesses identified in the existing approaches.

Under the current approaches, gross income serves as a key input for determining the operational risk charge. The proposal published today would be based on a statistically superior measure of operational risk, to be termed the Business Indicator (BI). In parallel with this consultative process, the Committee is collecting additional data to help validate its proposals.

The Committee welcomes comments on all aspects of this consultative document. Comments should be uploaded here[2] by 6 January 2015. All comments will be published on the website of the Bank for International Settlements unless a respondent requests confidential treatment.

The Committee is also publishing today a review of banks’ implementation[3] of the 2011 Principles for the Sound Management of Operational Risk[4]. The principles embody the lessons from the financial crisis and evolving sound practice in operational risk management. The review covered 60 systemically important banks (SIBs) in 20 jurisdictions and took the form of a questionnaire against which banks self-assessed the extent and quality of their implementation.

Progress in implementing the principles varies significantly across banks and, overall, more work is needed to achieve full implementation. In particular, four principles that have been identified as among the least thoroughly implemented are: (i) operational risk identification and assessment; (ii) change management; (iii) operational risk appetite and tolerance; and (iv) disclosure. The Committee encourages supervisors to continue working with banks to ensure that plans are in place to improve compliance with the principles, and to achieve a level of implementation commensurate with banks’ size, complexity and risk exposure.

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