The Standardised Approach

In the Standardised Approach, banks’ activities are divided into eight business lines: corporate finance, trading and sales, retail banking, commercial banking, payment and settlement, agency services, asset management, and retail brokerage. The business lines are defined in detail in OPE25.16 to OPE25.25.

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 requirement 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. It should be noted that in the Standardised Approach gross income is measured for each business line, not the whole institution, i.e. in corporate finance, the indicator is the gross income generated in the corporate finance business line.

The total capital requirement is calculated as the three-year average of the simple summation of the regulatory capital requirements across each of the business lines in each year. In any given year, negative capital requirements (resulting from negative gross income) in any business line may offset positive capital requirements in other business lines without limit.1 However, where the aggregate capital requirement across all business lines within a given year is negative, then the input to the numerator for that year will be zero.2

The total capital requirement under the Standardised Approach, K_TSA, may be expressed as follows, where GI_1-8 = annual gross income in a given year, as defined in the Basic Indicator Approach, for each of the eight business lines and β_1-8 = a fixed percentage, set by the Committee, relating the level of required capital to the level of the gross income for each of the eight business lines.

Qualifying criteria for the Standardised Approach

In order to qualify for use of the Standardised Approach, a bank must satisfy its supervisor that, at a minimum:

Supervisors will have the right to insist on a period of initial monitoring of a bank’s Standardised Approach before it is used for regulatory capital purposes.

A bank must develop specific policies and have documented criteria for mapping gross income for current business lines and activities into the standardised framework. The criteria must be reviewed and adjusted for new or changing business activities as appropriate. The principles for business line mapping are set out in OPE25.16 to OPE25.25.

As some internationally active banks will wish to use the Standardised Approach, it is important that such banks have adequate operational risk management systems. Consequently, an internationally active bank using the Standardised Approach must meet the following additional criteria:3

The alternative standardised approach

At national supervisory discretion a supervisor can choose to allow a bank to use the Alternative Standardised Approach (ASA) provided the bank is able to satisfy its supervisor that this alternative approach provides an improved basis by, for example, avoiding double counting of risks. Once a bank has been allowed to use the ASA, it will not be allowed to revert to use of the Standardised Approach without the permission of its supervisor. It is not envisaged that large diversified banks in major markets would use the ASA.

Supervisors allowing banks to use the ASA must decide on the appropriate qualifying criteria for that approach, as the criteria set forth in OPE25.7 and OPE25.8 may not be appropriate.

Under the ASA, the operational risk capital requirement/methodology is the same as for the Standardised Approach except for two business lines — retail banking and commercial banking. For these business lines, loans and advances — multiplied by a fixed factor “m” — replaces gross income as the exposure indicator. The betas for retail and commercial banking are unchanged from the Standardised Approach.

The ASA operational risk capital requirement, K_RB, for retail banking (with the same basic formula for commercial banking) can be expressed as follows, where β_RB is the beta for the retail banking business line, LA_RB is total outstanding retail loans and advances (non-risk weighted and gross of provisions), averaged over the past three years, and m is 0.035:

For the purposes of the ASA, total loans and advances in the retail banking business line consists of the total drawn amounts in the following credit portfolios: retail, small or medium-sized entities (SMEs) treated as retail, and purchased retail receivables. For commercial banking, total loans and advances consists of the drawn amounts in the following credit portfolios: corporate, sovereign, bank, specialised lending, SMEs treated as corporate and purchased corporate receivables. The book value of securities held in the banking book should also be included.

Under the ASA, banks may aggregate retail and commercial banking (if they wish to) using a beta of 15%. Similarly, those banks that are unable to disaggregate their gross income into the other six business lines can aggregate the total gross income for these six business lines using a beta of 18%, with negative gross income treated as described in OPE25.3 and OPE25.4.

As under the Standardised Approach, the total capital requirement for the ASA is calculated as the simple summation of the regulatory capital requirements across each of the eight business lines.

Business lines

All activities must be mapped into the eight level 1 business lines in Table 2 in a mutually exclusive and jointly exhaustive manner.

Any banking or non-banking activity which cannot be readily mapped into the business line framework, but which represents an ancillary function to an activity included in the framework, must be allocated to the business line it supports. If more than one business line is supported through the ancillary activity, an objective mapping criteria must be used.

When mapping gross income, if an activity cannot be mapped into a particular business line then the business line yielding the highest requirement must be used. The same business line equally applies to any associated ancillary activity.

Banks may use internal pricing methods to allocate gross income between business lines provided that total gross income for the bank (as would be recorded under the Basic Indicator Approach) still equals the sum of gross income for the eight business lines.

The mapping of activities into business lines for operational risk capital purposes must be consistent with the definitions of business lines used for regulatory capital calculations in other risk categories, ie credit and market risk. Any deviations from this principle must be clearly motivated and documented.

The mapping process used must be clearly documented. In particular, written business line definitions must be clear and detailed enough to allow third parties to replicate the business line mapping. Documentation must, among other things, clearly motivate any exceptions or overrides and be kept on record.

Processes must be in place to define the mapping of any new activities or products.

Senior management is responsible for the mapping policy (which is subject to the approval by the board of directors).

The mapping process to business lines must be subject to independent review.

There are a variety of valid approaches that banks can use to map their activities to the eight business lines, provided the approach used meets the business line mapping principles. Nevertheless, the Committee is aware that some banks would welcome further guidance. The following is therefore an example of one possible approach that could be used by a bank to map its gross income:

Calculation of risk-weighted assets

The risk-weighted assets for operational risk under the standardised approaches are determined by multiplying the capital requirements calculated as set out in this chapter by 12.5.