Basel IV Operational risk

The Basel Committee on Banking Supervision has proposed a new approach to operational risk, termed the Standardised Measurement Approach (SMA). It replaces the existing approaches and also foresees the withdrawal of internal modelling for operational risk regulatory capital purposes. The key objectives of SMA are to: (1) reduce the model complexity of the current modelling approach, (2) promote the comparability of risk-based capital measures and (3) reduce the variability in risk-weighted asset calculations and capital ratios across banks. The measure combines both the simplicity and comparability of a standardised approach with bank-specific loss data, resulting in a more risk-sensitive, yet standardised measure of operational risk.

Implementation / enforcement 10/2014 - 12/2018

Basel issued final standards by the end 2016. Implementation arrangements are under consideration.

Although the latest proposals are expected to have a lesser impact on the majority of banks than previous proposals, which could have increased their operational risk capital charges by up to 70%, the impact remains significant for some banks. Larger banks would be allowed some recognition of bank-specific loss data similar to current internal models, but they would not be able to base their calculations on external data, forward-looking scenario analyses or data on business environment and internal controls. Smaller banks would have to cope with increasing model complexity and loss data requirements. However, their risk measurement may increase in terms of accuracy.

Further information:
Basel consultation on revisions to the standardised measurement approach for operational risk

Gert-Jan Thomassen Partner
Categories: Liquidity Capital and Risk