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Actual for You - Basel II's Three Approaches to Operational Risk Management
2 minutes. That’s how long it takes for an employer to decide whether they want to hire you or not. First impressions set the tone for the interview and in the vast majority of cases, once that impression is set, it is not usually turned around. So here are some important tips you can use to ensure you make a great first impression.Energy level. Show some bounce in your step. Act like you are excited to be there and are filled with ideas.Eye contact. Look the interviewer right in the eye to make person-to-person contact. And SMILE like you are happy to see them. People instinctively react well to happy, smiling people.Watch your handshake. Everyone knows that a dead-fish handshake is the kiss of death. So are sweaty palms (put baby powder in your pocket if you have to). Knowing that a handshake is so important, have you tested yours? Try shaking your loved ones’ hand and see how it works. Women in particular tend to overcompensate and shake hands too hard.Dress appropriately. You can never go wrong by dressing conservatively. If you are not sure, for example, whether you should wear a tie or not (suit for women), try asking the receptionist. Just say “I am coming in for an interview on Friday and just wondered if you could help me. What is the dress code there?” Receptionists generally love to help. DO NOT OVERDRESS. I know a well-qualified executive who showed up in a double-breas
Based on this, bank supervisors will require the bank to calculate its regulatory capital requirement as the sum of expected loss (EL) and unexpected loss (UL), unless the bank can demonstrate that it is adequately capturing EL in its internal business practices (to base the minimum regulatory capital requirement on UL alone, the bank must be able to demonstrate to the satisfaction of its national supervisor that it has measured and accounted for its EL exposure).
A bank needs to have a credible, transparent, well-documented and verifiable approach for weighting these basic elements in its overall operational risk measurement system.
Internal loss data is critical to linking a bank's risk estimates to its actual loss experience. Such data is most relevant when it is clearly linked to a bank's current business activities, technological processes and risk management procedures. To do this a bank must have documented procedures for assessing the on-going relevance of historical loss data, including those situations in which judgment overrides or other adjustments may be used, to what extent they may be used and who is authorized to make such decisions. Internally generated operational risk measures used for regulatory capital purposes must be based on a minimum five-year observation period of internal loss data. However, when the bank fi
As populations in the developed world are growing older and many countries are experiencing a crisis in the pension system, we are facing the prospect of having to work past the usual retirement age. Yet, at the same time, older people are not always welcomed back into the work force. Many also have difficulty finding a new job if they have an unbroken track record and are simply looking for a change in career after the age of 40.There are a number of steps you can take to maximize your chances of getting a job, despite negative views regarding age on the part of some employers.When writing your CV or r?sum?, be sure to target it for the job in question. You can do this by highlighting all the skills and experience which are needed for the job and then proving that you have got them.It is not necessary to put personal information on your CV – in many countries it is illegal to ask about age and this will also become law in the UK in October of this year. You should either leave out your date of birth completely or put it at the end. Do not mention your marital status or the number of children you have or their ages. This is not relevant to the job!The fact that you are older means that you have valuable experience in many areas and you need to make good use of this in your application. Don’t worry if you are returning to work after bringing up children – soft skills, such as communication, time manag
Under the Basic Indicator Approach banks must hold capital for operational risk equal to the average over the previous three years of a fixed percentage (15% for this approach) of positive annual gross income (figures in respect of any year in which annual gross income was negative or zero are excluded).
Although no specific criteria are set out for use of the Basic Indicator Approach, banks using this method are encouraged to comply with the Committee’s guidance on “Sound Practices for the Management and Supervision of Operational Risk” (BIS; February 2003). These principles require:
•A hands on approach in the creation of an appropriate risk management environment,
•Positive actions in the identification, assessment, monitoring and control of operational risk,
•Adequate public disclosure.
Under the Standardized Approach a bank’s activities are divided into eight business lines. Within each business line, gross income is a broad indicator that serves as a stand-in for the level of business operations and therefore the probable size of operational risk exposure within each of these business lines. The capital charge for each business line is calculated by multiplying gross income by a factor (called the “beta”) assigned to that business line. The beta serves as a substitute 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. The business lines and the beta factors range from 12% for “retail banking”, “asset management” and “retail brokerage”; 15% for “commercial banking” and “agency services” to 18% for “corporate finance”, “trading & sales” and “payment & settlement”.
The total capital charge is calculated as the three-year average of the simple summation of the regulatory capital charges across each of the business lines in each year. In any given year, a negative capital charges (as a result of negative gross income) in any business line may offset positive capital charges in other business lines without limit.
At national supervisory level, the supervisor can choose to allow a bank to use the Alternative Standardized Approach (ASA) provided the bank is able to satisfy its supervisor that this alternative approach provides an improved basis for measurement of risks. Under the ASA, the operational risk capital charge/methodology is the same as for the Standardized Approach except that two business lines – “retail banking” and “commercial banking” where a fixed factor ‘m’ – replaces gross income as the exposure indicator and is related to the extent of loans granted in these areas.
Under the Advanced Measurement Approaches (AMA) the regulatory capital requirement equals the risk measure generated by the bank’s internal operational risk measurement system using specific quantitative and qualitative criteria. Use of the AMA is subject to supervisory approval.
Supervisory approval has to be conditional on the bank being able to show to the satisfaction of the supervisory authority that the allocation mechanism for these subsidiaries is appropriate and can be supported empirically. The quantitative standards that apply to internally generated operational risk measures for purposes of calculating the regulatory minimum capital charge are that any internal operational risk measurement system must be consistent with the definition of operational risk and a range of defined loss event types (covering all operational aspects such as fraud, employee practices, workplace safety, business practices, processing practices, business disruption and loss of physical assets).
To qualify for use of the Advanced Measurement Approaches (AMA), a bank must satisfy its supervisor that,
•The banks board of directors and senior management, are actively involved in the oversight of the operational risk management framework;
•The bank has an operational risk management system that is conceptually sound and which includes an independent operational risk management function that is responsible for the design and implementation of the bank’s operational risk management framework;
•The bank has It has sufficient resources to use this approach in the major business lines as well as the control and audit areas.
A bank using the AMA will be subject to a period of initial monitoring by its supervisor before it can be used for regulatory purposes. This period will allow the supervisor to determine if the approach is credible and appropriate. The bank’s internal measurement system must be able to reasonably estimate unexpected losses based on the combined use of internal and relevant external loss data, scenario analysis and bank-specific business environment and internal control factors.
The bank’s measurement system must also be capable of supporting an allocation of economic capital for operational risk across business lines in a manner that creates incentives to improve business line operational risk management.
Additionally,
•The operational risk management function is responsible for documenting policies and procedures concerning operational risk management and controls, designing and implementing the bank’s operational risk measurement methodology, designing and implementing a risk-reporting system for operational risk, and developing strategies to identify, measure, monitor and control/mitigate operational risk,
•The bank’s internal operational risk measurement system must be closely integrated into the day-to-day risk management processes of the bank and its output must be an integral part of the process of monitoring and controlling the bank’s operational risk profile. This information must play a major role in risk reporting, management reporting, internal capital allocation, and risk analysis.
•Operational risk exposures and loss experience must be reported regularly to business unit management, senior management, and to the board of directors.
•The bank’s operational risk management system must be well documented and the bank must have a routine in place for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operational risk management system, which must include policies for the treatment of noncompliance issues.
•Internal and/or external auditors must perform regular reviews of the operational risk management processes and measurement systems. This review must include both the activities of the business units and of the independent operational risk management function.
•The validation of the operational risk measurement system by external auditors and/or supervisory authorities must include the verification that the internal validation processes are operating in a satisfactory manner; and making sure that data flows and processes associated with the risk measurement system are transparent and accessible. In particular, it is necessary that auditors and supervisory authorities are in a position to have easy access, whenever they judge it necessary and under appropriate procedures, to the system’s specifications and parameters.
Because the analytical approaches for operational risk continue to evolve the approach or distributional assumptions used to generate the operational risk measure for regulatory capital purposes is not being specified by the Basel Committee. A bank must however be able to show that its approach captures potentially severe ‘tail’ loss events. Irrespective of the approach is used, a bank must demonstrate that its operational risk measure meets a soundness standard comparable to that of the internal ratings-based approach for credit risk.
Based on this, bank supervisors will require the bank to calculate its regulatory capital requirement as the sum of expected loss (EL) and unexpected loss (UL), unless the bank can demonstrate that it is adequately capturing EL in its internal business practices (to base the minimum regulatory capital requirement on UL alone, the bank must be able to demonstrate to the satisfaction of its national supervisor that it has measured and accounted for its EL exposure).
A bank needs to have a credible, transparent, well-documented and verifiable approach for weighting these basic elements in its overall operational risk measurement system.
Internal loss data is critical to linking a bank's risk estimates to its actual loss experience. Such data is most relevant when it is clearly linked to a bank's current business activities, technological processes and risk management procedures. To do this a bank must have documented procedures for assessing the on-going relevance of historical loss data, including those situations in which judgment overrides or other adjustments may be used, to what extent they may be used and who is authorized to make such decisions. Internally generated operational risk measures used for regulatory capital purposes must be based on a minimum five-year observation period of internal loss data. However, when the bank fir
Job search on the internet has gradually become common. The rapid growth of the online culture with more and more people surfing the web followed by more and more different offers, mean that the internet has become a useful tool for many everyday activities.We have also seen an increase in the number of people doing a career search online or using the web in the search for employment. Since large online employment or work position databases has grown tremendously the recent years, more and more career or job position searchers have found it much easier and more convenient to use the internet rather than the old-fashioned way of combing the local newspaper.Even though the internet provides online marketplaces where the average person can choose between jobs or positions from sources that outperforms any traditional employment source seen before, when it comes to the amount of jobs and the variation width of geographical locations, this situation is not without problems. You can find a job anywhere in the world for any job or position that you wish, but so can someone else. Most companies who offer jobs online are overflowed with resumes after having been listing an available position online. Thus it goes without saying that to stand apart from the crowd, you have to have the ideal set of skills and also be desirable in other ways. If not, your resume will not even be noticed.Another problem with ap
The total capital charge is calculated as the three-year average of the simple summation of the regulatory capital charges across each of the business lines in each year. In any given year, a negative capital charges (as a result of negative gross income) in any business line may offset positive capital charges in other business lines without limit.
At national supervisory level, the supervisor can choose to allow a bank to use the Alternative Standardized Approach (ASA) provided the bank is able to satisfy its supervisor that this alternative approach provides an improved basis for measurement of risks. Under the ASA, the operational risk capital charge/methodology is the same as for the Standardized Approach except that two business lines – “retail banking” and “commercial banking” where a fixed factor ‘m’ – replaces gross income as the exposure indicator and is related to the extent of loans granted in these areas.
Under the Advanced Measurement Approaches (AMA) the regulatory capital requirement equals the risk measure generated by the bank’s internal operational risk measurement system using specific quantitative and qualitative criteria. Use of the AMA is subject to supervisory approval.
Supervisory approval has to be conditional on the bank being able to show to the satisfaction of the supervisory authority that the allocation mechanism for these subsidiaries is appropriate and can be supported empirically. The quantitative standards that apply to internally generated operational risk measures for purposes of calculating the regulatory minimum capital charge are that any internal operational risk measurement system must be consistent with the definition of operational risk and a range of defined loss event types (covering all operational aspects such as fraud, employee practices, workplace safety, business practices, processing practices, business disruption and loss of physical assets).
To qualify for use of the Advanced Measurement Approaches (AMA), a bank must satisfy its supervisor that,
•The banks board of directors and senior management, are actively involved in the oversight of the operational risk management framework;
•The bank has an operational risk management system that is conceptually sound and which includes an independent operational risk management function that is responsible for the design and implementation of the bank’s operational risk management framework;
•The bank has It has sufficient resources to use this approach in the major business lines as well as the control and audit areas.
A bank using the AMA will be subject to a period of initial monitoring by its supervisor before it can be used for regulatory purposes. This period will allow the supervisor to determine if the approach is credible and appropriate. The bank’s internal measurement system must be able to reasonably estimate unexpected losses based on the combined use of internal and relevant external loss data, scenario analysis and bank-specific business environment and internal control factors.
The bank’s measurement system must also be capable of supporting an allocation of economic capital for operational risk across business lines in a manner that creates incentives to improve business line operational risk management.
Additionally,
•The operational risk management function is responsible for documenting policies and procedures concerning operational risk management and controls, designing and implementing the bank’s operational risk measurement methodology, designing and implementing a risk-reporting system for operational risk, and developing strategies to identify, measure, monitor and control/mitigate operational risk,
•The bank’s internal operational risk measurement system must be closely integrated into the day-to-day risk management processes of the bank and its output must be an integral part of the process of monitoring and controlling the bank’s operational risk profile. This information must play a major role in risk reporting, management reporting, internal capital allocation, and risk analysis.
•Operational risk exposures and loss experience must be reported regularly to business unit management, senior management, and to the board of directors.
•The bank’s operational risk management system must be well documented and the bank must have a routine in place for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operational risk management system, which must include policies for the treatment of noncompliance issues.
•Internal and/or external auditors must perform regular reviews of the operational risk management processes and measurement systems. This review must include both the activities of the business units and of the independent operational risk management function.
•The validation of the operational risk measurement system by external auditors and/or supervisory authorities must include the verification that the internal validation processes are operating in a satisfactory manner; and making sure that data flows and processes associated with the risk measurement system are transparent and accessible. In particular, it is necessary that auditors and supervisory authorities are in a position to have easy access, whenever they judge it necessary and under appropriate procedures, to the system’s specifications and parameters.
Because the analytical approaches for operational risk continue to evolve the approach or distributional assumptions used to generate the operational risk measure for regulatory capital purposes is not being specified by the Basel Committee. A bank must however be able to show that its approach captures potentially severe ‘tail’ loss events. Irrespective of the approach is used, a bank must demonstrate that its operational risk measure meets a soundness standard comparable to that of the internal ratings-based approach for credit risk.
Based on this, bank supervisors will require the bank to calculate its regulatory capital requirement as the sum of expected loss (EL) and unexpected loss (UL), unless the bank can demonstrate that it is adequately capturing EL in its internal business practices (to base the minimum regulatory capital requirement on UL alone, the bank must be able to demonstrate to the satisfaction of its national supervisor that it has measured and accounted for its EL exposure).
A bank needs to have a credible, transparent, well-documented and verifiable approach for weighting these basic elements in its overall operational risk measurement system.
Internal loss data is critical to linking a bank's risk estimates to its actual loss experience. Such data is most relevant when it is clearly linked to a bank's current business activities, technological processes and risk management procedures. To do this a bank must have documented procedures for assessing the on-going relevance of historical loss data, including those situations in which judgment overrides or other adjustments may be used, to what extent they may be used and who is authorized to make such decisions. Internally generated operational risk measures used for regulatory capital purposes must be based on a minimum five-year observation period of internal loss data. However, when the bank fi
Reaching success in any endeavor requires many things. It doesn't matter if you're out to complete a project or you're working on accomplishing a big dream.One of the best things that you can do for yourself is to build a team to help you.If you're an employer, your staff is your team. When you're an entrepreneur, your accountant, your suppliers; they're all part of your team. If you're in a group environment and have been handed a project, look around and see who's on your team.As a entrepreneur, especially just starting out, you need a team. But how do you build one when you're on your own?First, look for champions. These are the people who have been where you are and know what you are or will go thru and have succeeded. Tell them of your dreams and goals. Ask for their help and advice. I have never met a champion that was unwilling to help when asked.Next, assess your own strengths and weaknesses. Once you know what you're up against, you have a clearer picture of what needs you have that another may be able to help fill. If you have no trouble generating paperwork but hate to file it, who can you go to for help.A spouse or children maybe. Maybe finding a secretary that can teach you office management shortcuts.A team helps to generate ideas that will move you forward. They can also point out potential problems to be worked out.<
To qualify for use of the Advanced Measurement Approaches (AMA), a bank must satisfy its supervisor that,
•The banks board of directors and senior management, are actively involved in the oversight of the operational risk management framework;
•The bank has an operational risk management system that is conceptually sound and which includes an independent operational risk management function that is responsible for the design and implementation of the bank’s operational risk management framework;
•The bank has It has sufficient resources to use this approach in the major business lines as well as the control and audit areas.
A bank using the AMA will be subject to a period of initial monitoring by its supervisor before it can be used for regulatory purposes. This period will allow the supervisor to determine if the approach is credible and appropriate. The bank’s internal measurement system must be able to reasonably estimate unexpected losses based on the combined use of internal and relevant external loss data, scenario analysis and bank-specific business environment and internal control factors.
The bank’s measurement system must also be capable of supporting an allocation of economic capital for operational risk across business lines in a manner that creates incentives to improve business line operational risk management.
Additionally,
•The operational risk management function is responsible for documenting policies and procedures concerning operational risk management and controls, designing and implementing the bank’s operational risk measurement methodology, designing and implementing a risk-reporting system for operational risk, and developing strategies to identify, measure, monitor and control/mitigate operational risk,
•The bank’s internal operational risk measurement system must be closely integrated into the day-to-day risk management processes of the bank and its output must be an integral part of the process of monitoring and controlling the bank’s operational risk profile. This information must play a major role in risk reporting, management reporting, internal capital allocation, and risk analysis.
•Operational risk exposures and loss experience must be reported regularly to business unit management, senior management, and to the board of directors.
•The bank’s operational risk management system must be well documented and the bank must have a routine in place for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operational risk management system, which must include policies for the treatment of noncompliance issues.
•Internal and/or external auditors must perform regular reviews of the operational risk management processes and measurement systems. This review must include both the activities of the business units and of the independent operational risk management function.
•The validation of the operational risk measurement system by external auditors and/or supervisory authorities must include the verification that the internal validation processes are operating in a satisfactory manner; and making sure that data flows and processes associated with the risk measurement system are transparent and accessible. In particular, it is necessary that auditors and supervisory authorities are in a position to have easy access, whenever they judge it necessary and under appropriate procedures, to the system’s specifications and parameters.
Because the analytical approaches for operational risk continue to evolve the approach or distributional assumptions used to generate the operational risk measure for regulatory capital purposes is not being specified by the Basel Committee. A bank must however be able to show that its approach captures potentially severe ‘tail’ loss events. Irrespective of the approach is used, a bank must demonstrate that its operational risk measure meets a soundness standard comparable to that of the internal ratings-based approach for credit risk.
Based on this, bank supervisors will require the bank to calculate its regulatory capital requirement as the sum of expected loss (EL) and unexpected loss (UL), unless the bank can demonstrate that it is adequately capturing EL in its internal business practices (to base the minimum regulatory capital requirement on UL alone, the bank must be able to demonstrate to the satisfaction of its national supervisor that it has measured and accounted for its EL exposure).
A bank needs to have a credible, transparent, well-documented and verifiable approach for weighting these basic elements in its overall operational risk measurement system.
Internal loss data is critical to linking a bank's risk estimates to its actual loss experience. Such data is most relevant when it is clearly linked to a bank's current business activities, technological processes and risk management procedures. To do this a bank must have documented procedures for assessing the on-going relevance of historical loss data, including those situations in which judgment overrides or other adjustments may be used, to what extent they may be used and who is authorized to make such decisions. Internally generated operational risk measures used for regulatory capital purposes must be based on a minimum five-year observation period of internal loss data. However, when the bank fi
"Half the world is composed of people who have something to say and can't, and the other half who have nothing to say and keep saying it." — Robert Frost, early 20th century American poetWe can't inspire and energize people with memos, mission statements, data and analysis, charts, goals and objectives, measurements, systems, or processes. These are important factors in improving performance. But that's management, not leadership. People are inspired and aroused by exciting mental pictures of a preferred future, principles or values that ring true, and being part of a higher cause or purpose that helps them feel they're making a difference.Highly interconnected with and dependent upon a leader's ability to provide Focus and Context is his or her communication skills — especially verbal skills. When I was eighteen and starting my Culligan career I took a Dale Carnegie sales course. I followed that with their public speaking course. Both had a major impact on my leadership performance. I came to realize that learning the basic persuasion skills of clarifying and simplifying what we're trying to say, tuning into our audience, and grabbing them by the handles of their emotions, is critical to effective leadership.When I look at the effective leaders I've met that inspire, energize, and arouse people to improved performance, they are all effective speakers. Some are charismatic and dynamic orators. Others are sof
•The bank’s internal operational risk measurement system must be closely integrated into the day-to-day risk management processes of the bank and its output must be an integral part of the process of monitoring and controlling the bank’s operational risk profile. This information must play a major role in risk reporting, management reporting, internal capital allocation, and risk analysis.
•Operational risk exposures and loss experience must be reported regularly to business unit management, senior management, and to the board of directors.
•The bank’s operational risk management system must be well documented and the bank must have a routine in place for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operational risk management system, which must include policies for the treatment of noncompliance issues.
•Internal and/or external auditors must perform regular reviews of the operational risk management processes and measurement systems. This review must include both the activities of the business units and of the independent operational risk management function.
•The validation of the operational risk measurement system by external auditors and/or supervisory authorities must include the verification that the internal validation processes are operating in a satisfactory manner; and making sure that data flows and processes associated with the risk measurement system are transparent and accessible. In particular, it is necessary that auditors and supervisory authorities are in a position to have easy access, whenever they judge it necessary and under appropriate procedures, to the system’s specifications and parameters.
Because the analytical approaches for operational risk continue to evolve the approach or distributional assumptions used to generate the operational risk measure for regulatory capital purposes is not being specified by the Basel Committee. A bank must however be able to show that its approach captures potentially severe ‘tail’ loss events. Irrespective of the approach is used, a bank must demonstrate that its operational risk measure meets a soundness standard comparable to that of the internal ratings-based approach for credit risk.
Based on this, bank supervisors will require the bank to calculate its regulatory capital requirement as the sum of expected loss (EL) and unexpected loss (UL), unless the bank can demonstrate that it is adequately capturing EL in its internal business practices (to base the minimum regulatory capital requirement on UL alone, the bank must be able to demonstrate to the satisfaction of its national supervisor that it has measured and accounted for its EL exposure).
A bank needs to have a credible, transparent, well-documented and verifiable approach for weighting these basic elements in its overall operational risk measurement system.
Internal loss data is critical to linking a bank's risk estimates to its actual loss experience. Such data is most relevant when it is clearly linked to a bank's current business activities, technological processes and risk management procedures. To do this a bank must have documented procedures for assessing the on-going relevance of historical loss data, including those situations in which judgment overrides or other adjustments may be used, to what extent they may be used and who is authorized to make such decisions. Internally generated operational risk measures used for regulatory capital purposes must be based on a minimum five-year observation period of internal loss data. However, when the bank fi
Promotional pens are advertising for your business and the best part about them is that they work for you for little cost. Promotional pens come in a wide variety of shapes, colors, types and sizes – there is certainly something to meet your needs and your budget. Promotional pens are an excellent addition to your advertising and promotional items – they are inexpensive yet effective.Many businesses have promotional pens that are working for them because they have found the value of them to be nearly priceless. It’s true that you need a wide variety of advertising avenues for your business and promotional pens are just another form or promotion for your company.Promotional pens run in price from just a few lira each to more expensive executive pen sets. The less expensive promotional pens are perfect to give out everywhere, to everyone you meet. Take them to trade shows and offer one to everyone who comes to your booth – they are certainly more effective than pamphlets and brochures which are most likely to never be looked at again when people leave the trade show. Hand them to your current customers, send them with your mail outs, give a few to your business customers to use in their office.Printed pens end up everywhere…people leave them behind, leave them on their desk, at the bank, at another business. Everyone uses pens and many people will pick up whatever pen is available and at hand – that pen could
Based on this, bank supervisors will require the bank to calculate its regulatory capital requirement as the sum of expected loss (EL) and unexpected loss (UL), unless the bank can demonstrate that it is adequately capturing EL in its internal business practices (to base the minimum regulatory capital requirement on UL alone, the bank must be able to demonstrate to the satisfaction of its national supervisor that it has measured and accounted for its EL exposure).
A bank needs to have a credible, transparent, well-documented and verifiable approach for weighting these basic elements in its overall operational risk measurement system.
Internal loss data is critical to linking a bank's risk estimates to its actual loss experience. Such data is most relevant when it is clearly linked to a bank's current business activities, technological processes and risk management procedures. To do this a bank must have documented procedures for assessing the on-going relevance of historical loss data, including those situations in which judgment overrides or other adjustments may be used, to what extent they may be used and who is authorized to make such decisions. Internally generated operational risk measures used for regulatory capital purposes must be based on a minimum five-year observation period of internal loss data. However, when the bank first moves to the AMA, a three-year historical data window is acceptable.
To qualify for regulatory capital purposes, a bank's internal loss collection processes must be able to map its historical internal loss data into the relevant supervisory categories as are defined in detail in the Basel II Annexes. The bank must have documented objective criteria for allocating losses to the specified business lines and event types. A bank's internal loss data must be comprehensive. It must capture all material activities and exposures from all appropriate sub-systems and geographic locations. The bank must be able to justify that any excluded activities or exposures, both individually and in combination would not significantly impact the overall risk estimates. This should be based on an appropriate minimum gross loss threshold for internal loss data collection. Additionally, a bank should collect information relating the date of the event, any recoveries of loss amounts, as well as descriptive information about the drivers or causes of the loss event. The level of detail in any descriptive information should be appropriate to the size of the gross loss amount.
Operational risk losses that are related to credit risk and have traditionally been included in banks’ credit risk databases (e.g. collateral management failures) must continue to be treated as credit risk for the purposes of calculating minimum regulatory capital. It follows that such losses will not be subject to the operational risk capital charge. Nevertheless, for the purposes of internal operational risk management, banks must identify all material operational risk losses consistent with the scope of the definition of operational risk and the defined event types, including those related to credit risk.
A bank’s operational risk measurement system must use pertinent external data (either public data and/or pooled industry data), especially when there is any possibility to believe that the bank is potentially exposed to severe losses, however infrequent. Additionally a bank must use scenario analysis of expert opinion in conjunction with external data to evaluate its exposure to high-severity events.
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