Operational risk

Operational risk, or event risk, is the risk of losses because of deficient or erroneous internal procedures, human or system errors, or external events. This risk type was not included in the current capital adequacy rules (Basel I).

CRD includes three methods to measure operational risk:

• Basic Indicator Approach
  
• Standardised Approach
  
• Advanced Measurement Approach

The Basic Indicator Approach focuses on only one indicator - gross income - for all the activities of a bank. The table below shows how this indicator is defined:

	Profit and loss item
+	Interest receivable and similar income
-	Interest payable and simliar charges
+	Income from shares and other variable/fixed-yield securities
+	Commissions/fees receivable
-	Commissions/fees payable
+/-	Net profit or net loss on financial operations
+	Other operating income

The indicator is multiplied by a fixed percentage, called the "alpha-factor" (15%), in order to calculate the required capital charge.

Standardised Approach
The Standardised Approach uses one indicator, the same as the Basic Indicator Approach, but different weightings ("beta-factors") for different lines of business, e.g. retail banking and commercial banking. In order to calculate the capital charge, the Bank multiplies a defined indicator by the relevant "beta-factor" for each business line. The sum of the capital requirements for the different lines of business should be used in the calculation of the capital requirement.

The table below gives an overview of how the required capital is calculated according to the Standardised Approach. 

	Line of business	Beta-faktor, %
	Corporate finance Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis Services related to underwriting Investment advice Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to the mergers and the purchase of undertakings Investment research and financial analysis and other forms of general recommendation relating to transactions in financial instruments	18
+	Trading and sales Dealing on own account Money broking Reception and transmission of orders in relation to one or more financial instruments Execution of orders on behalf of clients Placing of financial instruments without a firm commitment basis Operation of Multilateral Trading Facilities	18
+	Retail brokerage Reception and transmission of orders in relation to one or more financial instruments Execution of orders on behalf of clients Placing of financial instruments without a firm commitment basis	12
+	Commercial banking Acceptance of deposits and other repayable funds Lending Financial leasing Guarantees and commitments	15
+	Retail banking Acceptance of deposits and other repayable funds Lending Financial leasing Guarantees and commitments	12
+	Payment and settlement Money transmission services Issuing and administering means of payment	18
+	Agency services Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management	15
+	Asset management Portfolio management Managing of Undertakings for Collective Investments in Transferable Securities (UCITS) Other forms of asset management	12
=	Total capital requirement

 Advanced Measurement Approach (AMA)
Under AMA, financial institutions can use their internal loss data in combination with external loss data and scenario analyses as input in the estimation of the capital required.

The institutions must use the results of expert assessments to estimate exposure to very serious events (tail value at risk).
Moreover, the approach specifies a number of qualitative requirements for the collection of data and internal controls that must be met by institutions that want to apply AMA.

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Last updated/revised on January 31, 2008