| "Basel II" has been in the news an awful
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| | more advanced approach no longer meets
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| lot these past 18 month or so. Unlike
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| | the qualifying criteria for this
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| Basel I the new standard introduces a
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| | approach, it may require the bank to go
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| capital charge based on operational risk.
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| | back to a simpler approach for some or
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| The words Operational risk themselves
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| | all of its operations, until it meets the
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| immediately raise a whole bunch of
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| | conditions specified by the supervisor
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| questions; What is "Basel II"? What is
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| | for returning to a more advanced
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| operational risk? How is the charge going
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| | approach.A bank will be permitted to use
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| to be calculated? What are the
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| | the Basic Indicator or Standardized
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| operational risk standards that banks
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| | Approach for some parts of its operations
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| will have to comply with?Basel II or to
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| | and an AMA for others provided certain
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| use is full name "International
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| | minimum criteria are met. The conditions
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| Convergence of Capital Measurement and
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| | under which this is permitted are;-All
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| Capital Standards" defines operational
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| | operational risks of the bank's global,
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| risk as "the risk of loss resulting from
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| | consolidated operations must be
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| inadequate or failed internal processes,
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| | captured- All of the bank's operations
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| people and systems or from external
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| | that are covered by the Advanced
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| events". This definition explicitly
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| | Measurement Approaches must meet the
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| includes legal risk but excludes
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| | qualitative criteria for using an AMA,
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| strategic and reputational risk.In terms
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| | while those parts of its operations that
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| of the Basel II Accord there are three
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| | are using one of the simpler approaches
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| methods for calculating the capital
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| | meet the qualifying criteria for that
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| charges for operational risk. The methods
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| | approach-At implementation of an AMA, a
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| provide a range of increasing
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| | major part of the bank's operational
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| sophistication and risk sensitivity. The
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| | risks must be captured by the AMA-The
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| three approaches are:-Basic Indicator
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| | bank must provide its supervisor with a
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| Approach (BIA) - which requires banks to
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| | plan specifying its intended timetable
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| hold capital for operational risk equal
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| | for implementing the AMA across all its
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| to the average over the previous three
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| | operationsThe Basel Committee expects
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| years of a fixed percentage of positive
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| | that such approvals will only be granted
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| annual gross income.-Standardized
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| | on an exceptional basis and limited to
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| Approach - which uses gross income across
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| | circumstances where a bank is prevented
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| eight business lines as a stand-in for
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| | from meeting these conditions because of
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| the level of business operations and
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| | implementation decisions of supervisors
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| therefore the probable size of
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| | of the bank's subsidiary operations in
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| operational risk exposure within each
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| | other (foreign) jurisdictions.Despite the
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| business line.-Advanced Measurement
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| | relative brevity of the Operational Risk
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| Approaches (AMA) - this requires a bank
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| | section the Accord, the source material
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| to calculate its regulatory capital
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| | for risk mitigation is wide and deep
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| requirement as the sum of expected loss
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| | indeed. The following is a brief list of
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| and unexpected loss. This is a highly
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| | some of the current Basel guidelines
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| complicated process and still remains the
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| | dealing with various aspects of
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| subject of much controversy.The Basel
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| | operational risk.-"Sound Practices for
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| Committee has encouraged banks to move
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| | the Management and Supervision of
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| along the range of available approaches
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| | Operational Risk"-"A framework for
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| as they develop more sophisticated
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| | Internal Control Systems in Banking
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| operational risk measurement systems and
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| | Organizations"-"Internal Audits in Banks
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| practices.Internationally active banks,
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| | and the Supervisors Relationship with
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| as well as banks who have significant
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| | Auditors"-"The compliance function in
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| operational risk exposures (such as
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| | banks"-"Consolidated KYC Risk
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| specialized processing banks) are
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| | Management"-"Risk management principles
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| expected to use an approach that is more
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| | for electronic banking"-"Management and
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| sophisticated than the Basic Indicator
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| | Supervision of Cross-Border Electronic
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| Approach and which fits the risk profile
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| | Banking Activities".Stanley Epstein is a
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| of the institution.A bank will not be
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| | Principal Associate and Director of
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| allowed to revert to a simpler approach
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| | Citadel Advantage Ltd., a consultancy
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| once it has been approved for a more
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| | dealing in bank operations and
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| advanced approach without supervisory
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| | specializing in Operations Risk and
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| approval. However, if a national bank
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| | Payment Systems.
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| supervisor determines that a bank using a
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