As most major jurisdictions have now published their SMA proposals, we've published a report on Basel III and standardised approaches to capital.
The report is available to all members and non-members and provides in-depth analysis using the ORX global banking loss data.
About the report
In July 2023, the US Federal Reserve Bank published its Basel III endgame consultation. This means that most major jurisdictions had published their intentions for the timeline for implementation of the standardised approach for operational risk capital, previously known as the Standardised Measurement Approach (SMA), as well as the decision on the inclusion of losses within the capital calculation.
Therefore, this was an appropriate time to use the over two decades of ORX global banking loss data to analyse the standardised approaches for regulatory capital that have been available over this period and compare to various implementations of the new Standardised Approach.
Steve Bishop, ORX Research & Information Director comments:
"The analysis presented in this report leverages the ORX global banking loss database, encompassing 21 years of operational risk events from over 80 banks around the world. The ORX database has allowed for a detailed analysis of the impacts of the differing implementations of the SMA, as well as providing a view of the risks of the extant business lines."
Key highlights of the report include:
Business Lines Profiles
An examination of the relative riskiness of the business lines indicates differences between business lines and a lack of coherence between the level 2 lines.
Capital adequacy of the Basel II standardised methods
Examination of annual loss over TSA and BIA measures of capital (based purely on Gross Income) indicate that annual loss rarely exceeds 15% of the TSA or BIA capital charges. Moreover, there also appears to be a slight decrease in loss rates over the last ten years.
Analysis of the new Standardised Approach
Using approximations based on historic data, we have observed that the SMA capital measure is typically higher than the TSA. We also see that the Internal Loss Multiplier (ILM) is most often greater than one, meaning that in jurisdictions which opt to include the ILM, capital charges will be greater than if the ILM were excluded.
Steve Bishop, ORX Research & Information Director comments:
