Basel
ii in the United States of America
From the
Basel ii
Compliance Professionals Association (BCPA),
the largest association of Basel ii Professionals in the
world
Final Rule, USA: Risk-Based Capital Standards:
Advanced Capital Adequacy Framework — Basel II
Conceptual Overview
2.
The AMA for operational risk
The
final rule also includes the AMA for determining
risk-based capital requirements for operational risk.
Under
the final rule (consistent with the proposed rule),
operational risk is defined as the risk of loss resulting
from inadequate or failed internal processes, people, and
systems or from external events.
This
definition of operational risk
includes
legal risk – which is the risk of loss (including
litigation costs,
settlements, and regulatory fines) resulting from the
failure of the bank to comply with laws, regulations,
prudent ethical standards, and contractual obligations in
any aspect of the bank’s business – but excludes strategic
and reputational risks.
Under
the AMA, a bank must use its internal operational risk
management systems and processes to assess its exposure to
operational risk.
Given
the complexities involved in measuring operational risk,
the AMA provides banks with substantial
flexibility and, therefore, does not require a bank to use
specific methodologies or distributional assumptions.
Nevertheless, a bank using the AMA must demonstrate to the
satisfaction of its primary Federal supervisor that its
systems for managing and measuring operational risk meet
established standards, including producing an
estimate of
operational risk exposure that meets a one-year, 99.9th
percentile soundness
standard.
A bank’s
estimate of operational risk exposure includes both
expected operational loss (EOL)
and
unexpected operational
loss (UOL) and forms the basis of the bank’s risk based
capital requirement for operational risk.
The AMA
allows a bank to base its risk-based capital requirement
for operational risk on UOL alone if the bank can
demonstrate to the satisfaction of its primary Federal
supervisor that the bank has eligible operational risk
offsets, such as certain operational risk reserves, that
equal or exceed the bank’s EOL.
To the
extent that eligible operational risk offsets are less
than EOL, the bank’s risk-based capital requirement for
operational risk must incorporate the shortfall.
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