Reconsider The Principles For Sound Management Of Operational Risk

Author:Mr Stephen Lucas

Banks have invested heavily in their Operational Risk capability in recent years with many continuing to do so. The papers released at the start of the month by the Basel Committee on Banking Supervision (BCBS) indicate that the job is not yet done for such enhancement programmes and these latest proposals are likely to prompt organisations to reconsider the nature of their operational risk framework as well as their approach for operational risk regulatory capital calculation and the associated business case.

Earlier this month, the BCBS released two papers of interest and importance to operational risk. The first reflects the BCBS' findings following banks' self-assessment of their implementation of the Principles for Sound Management of Operational Risk; the second, their consultation on proposed changes to the Basic Indicator Approach (BIA) and the Standardised Approach (TSA) for operational risk capital calculation under Pillar 1.

Principles for Sound Management of Operational Risk

Unsurprisingly, banks' self-assessment indicated that they continue to implement the Principles with none of the Principles being 'fully complied with' across the 60 banks included in the exercise.

Key areas of focus for improvement include:

improving the implementation of each of the operational risk identification and assessment tools, including risk and control self-assessments, key risk indicators, external loss data, business process mapping, comparative analysis, and the monitoring of action plans generated from various operational risk management tools; enhancing the implementation of change management programmes and processes and ensure their effective monitoring; strengthening the implementation of the three-lines of defence, especially by refining the assignment of roles and responsibilities; and improving board and senior management oversight; articulation of operational risk appetite and tolerance statements; and risk disclosures. Pillar 1 Operational Risk Capital Requirements

The proposals being consulted on involve replacing the current BIA and TSA approaches with a revised Standardised Approach (SA). Gross income is replaced with a new Business Indicator (BI) and the alphas and betas would be replaced a newly calibrated regulatory coefficient ranging from 10-30% on a tiered basis depending on level of the BI.

The BI comprises the three components of a bank's income statement: the "interest component", the "services component", and the...

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