Roger Cole

English

Research Papers in Economics

  Basel Committee Proposals for
Operational Risk
September 2001 Working Paper
Roger Cole
Federal Reserve Board2
Development Process
!Dialogue with industry based on September OR
paper
!Consider results of QIS 2
!Issue new capital accord proposal 1st Quarter 2002
!Conduct QIS 3 during 3 month comment period
!Issue final new capital accord in 2nd Half 2002
!Implement in 20053
Definition
!Operational risk is the risk of loss resulting from
inadequate or failed internal processes, people and
systems or from external events.4
Three Pillar Framework
!Pillar I
 Capital Requirement
!Pillar II
 Economic capital allocation subject to supervisory review
 Sound practice guidance
!Pillar III
 Public disclosure/market discipline5
Pillar I Capital Approaches
!Basic Indicator
!Standardised (business line)
!Advanced Measurement6
Basic Indicator Approach
!Capital requirement is fixed percentage, a, of gross
income
!a is calculated assuming that OR capital allocation is
12 percent of minimum regulatory capital
!Weighted average a for large banks is 18.3%7
Standardised Approach
!Bank’s activities divided into 8 business lines
!Capital requirement for each business line is fixed
percentage, ßi, of line’s gross income
!Total OR capital is simple summation8
Determining the ßs
!12 percent of minimum regulatory capital is
distributed across 8 business lines in proportion to
OR economic capital allocation
!ßs calculated as business line regulatory capital
divided by business line gross income
!Weighted average ßs range from 11 percent for
“retail banking” to 20 percent for “trading and sales”
(high standard deviations)9
Advanced Measurement Approaches
!Based on bank’s internal risk measurement system
!Subject to qualitative and quantitative standards
 Requires use of internal data subject to a soundness
standard
!Subject to a floor capital requirement (transitional)
 75 percent of Standardised Approach10
AMAs currently under Development
!Internal measurement approach similar to
PD/LGD/EAD approach for credit risk
!Loss distribution approaches
!Scorecard approaches11
Data Collection
!Rely on industry working group to define loss event
data matrix
!Loss events are categorized by standardised business
lines and event types
!Examples of business lines are corporate finance,
“trading and sales” and retail banking
!Examples of event types are internal fraud, external
fraud, employment practices, business practices and
damage to physical assets.12
Risk Mitigation
!Sound management practices
!Internal controls
!Insurance protection13
Some Observations
!EL/UL and the uses of internal data
!Data limitations
!Positive incentive structure
 Advance to more risk sensitive approaches
 Continue development efforts

Basel committee proposals for operational risk

http://www.bostonfed.org/bankinfo/conevent/oprisk/cole.pdf

Basel committee proposals for operational risk

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Research Papers in Economics