In the context of operational risk, 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 It is now extended and partially superseded by Basel III.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 publis ...

capital adequacy rules for banking institutions. Basel II requires all banking institutions to set aside capital for operational risk. Standardized approach falls between

basic indicator approach The basic approach or basic indicator approach is a set of operational risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions. Basel II requires all banking institutions to set aside capital for opera ...

and

advanced measurement approach Advanced measurement approach (AMA) is one of three possible operational risk methods that can be used under Basel II by a bank or other financial institution. The other two are the Basic Indicator Approach and the Standardised Approach. The m ...

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 countries ...

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

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

, 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. Banking servi ...

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

, payment & settlement, agency services,

asset management Asset management is a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings ...

, and retail

brokerage A broker is a person or firm who arranges transactions between a buyer and a seller 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. Neither role should be confu ...

. 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 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