An American Bankers Association comment letter on the Basel Committee’s proposed revisions to the operational risk framework supports a simpler and standardized calculation of operational risk capital, but it urges the Basel Committee to consider its proposed methodological revisions. The Basel Committee released its proposal, “Standardized Measurement Approach for Operational Risk,” in March 2016.
The ABA’s comment letter states that the proposal recommends a Standardized Measurement Approach (SMA) to replace the Advanced Measurement Approach and the three existing standardized methodologies to calculate a capital charge for operational risk. The letter notes that the SMA is intended to balance simplicity, comparability, and risk sensitivity by combining a financial statement-based measure of operational risk—the Business Indicator (BI)—with an individual firm’s operational losses, known as the Loss Component (LC).
Insurance and hedges. The ABA supports replacing the AMA, but says the Committee should consider the inclusion of insurance and hedges when calculating operational risk capital. Under the Committee’s proposal, “[b]anks must not use losses net of insurance recoveries as an input for the SMA loss data set.” Hedges and insurance are key components of operational risk management, the ABA contends, and should be included ex-post when calculating an operational risk capital charge.
“We believe insurance and hedges should affect the overall operational risk capital to be held and agree with their not being a factor in calculating historical loss events via the LC,” says the ABA.
Proposed revisions. The letter includes a number of other revisions proposed by the ABA:
- exclude discontinued business activities from the LC;
- exclude “timing losses” from the LC Data Set;
- maintain the de minimis gross threshold of €20,000;
- apply the proposed net interest margin cap by discrete business line;
- permit the use of U.S. Generally Accepted Accounting Principles for BI calculation; and
- clarify the applicable exchange rate.
Questions. Finally, the ABA presents three questions for the Committee to answer:
- How frequently will the SMA framework be recalibrated, and will SMA calibration be made public?
- What is the length of the transition/implementation period, and will there be an opportunity to comment on the updated calibration?
- How frequently would capital calculations be required?
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