In the context of

operational risk Operational risk is the risk of losses caused by flawed or failed processes, policies, systems or events that disrupt business operations. Employee errors, criminal activity such as fraud, and physical events are among the factors that can tri ...

, the standardized approach or standardised approach is a set of operational risk measurement techniques proposed under

Basel II Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It is now extended and partially superseded by Basel III. The Basel II Accord was publ ...

capital adequacy rules for banking institutions. Basel II requires all banking institutions to set aside capital for

. Standardized approach falls between basic indicator approach and advanced measurement approach in terms of degree of complexity. Based on the original

Basel Accord The Basel Accords refer to the banking supervision accords (recommendations on banking regulations) issued by the Basel Committee on Banking Supervision (BCBS). Basel I was developed through deliberations among central bankers from major countri ...

, under the Standardised Approach, banks’ activities are divided into eight business lines:

corporate finance Corporate finance is an area of finance that deals with the sources of funding, and the capital structure of businesses, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and analy ...

, trading & sales,

retail banking Retail banking, also known as consumer banking or personal banking, is the provision of services by a bank to the general public, rather than to companies, corporations or other banks, which are often described as wholesale banking (corporate ...

commercial banking A commercial bank is a financial institution that accepts deposits from the public and gives loans for the purposes of consumption and investment to make a profit. It can also refer to a bank or a division of a larger bank that deals with whol ...

, payment & settlement, agency services,

asset management Asset management is a systematic approach to the governance and realization of all value for which a group or entity is responsible. It may apply both to tangible assets (physical objects such as complex process or manufacturing plants, infrastr ...

, and retail

brokerage A broker is a person or entity that arranges transactions between a buyer and a seller. This may be done for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neith ...

. Within each business line, gross income is a broad indicator that serves as a proxy for the scale of business operations and thus the likely scale of operational risk exposure within each of these business lines. The capital charge for each business line is calculated by multiplying

gross income For households and individuals, gross income is the sum of all wages, salaries, profits, interest payments, rents, and other forms of earnings, before any deductions or taxes. It is opposed to net income, defined as the gross income minus taxes ...

by a factor (denoted beta) assigned to that business line. Beta serves as a proxy for the industry-wide relationship between the operational risk loss experience for a given business line and the aggregate level of gross income for that business line. The total capital charge is calculated as the three-year average of the simple summation of the regulatory capital charges across each of the business lines in each year. In any given year, negative capital charges (resulting from negative gross income) in any business line may offset positive capital charges in other business lines without limit. In order to qualify for use of the standardised approach, a bank must satisfy its regulator that, at a minimum: *Its board of directors and senior management, as appropriate, are actively involved in the oversight of the operational risk management framework; *It has an operational risk management system that is conceptually sound and is implemented with integrity; and *It has sufficient resources in the use of the approach in the major business lines as well as the control and audit areas. On March 4, 2016, the Basel Committee on Banking Supervision finally updated its proposal for calculating operational risk capital, introducing the Standardized Measurement Approach (“SMA”). Building upon its 2014 version, the SMA would not only replace the existing standardized approaches, but also the Advanced Measurement Approach. Under the SMA, regulatory capital levels will be determined using a simple formulaic method which facilitates comparability across the industry.

References

*http://www.bis.org/publ/bcbsca.htm Basel II: Revised international capital framework (BCBS) *http://www.bis.org/publ/bcbs107.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) *http://www.bis.org/publ/bcbs118.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision) *http://www.bis.org/publ/bcbs128.pdf Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework, Comprehensive Version (BCBS) (June 2006 Revision) Basel II Capital requirement Operational risk {{bank-stub

See also

References