Operational risk

The previous methods for determining own fund requirements for operational risks have faced criticism in the past. Both the Basic Indicator Approach (BIA) and the Standardised Approach (SA) have been scrutinised. Critics maintain that these approaches incorrectly assume a linear relationship between the growth of income and the increase in operational risks. In addition, they contend that a rise in losses indirectly impacts the requirements for own funds, whilst these methods overlook the influence of an institution's total size on its operational risk. Conversely, the Advanced Measurement Approaches (AMA) have been criticised for their complexity, which renders them difficult to compare with methodologies employed by other institutions.

The Standardised Approach for Operational Risk (OpRisk) introduces the Business Indicator Component (BIC). The BIC reflects a more intricate connection between business operations and risk exposure, accounting for income and expense variances that impact the risk profile of financial institutions.

The reformation also brings to the fore the Business Indicator (BI), which is multiplied by a marginal coefficient to yield the BIC. This approach is designed to be inclusive, not discriminating against different business models and sizes. It embraces the diversity of the financial sector by applying a formula that scales with the institution's impact on the financial ecosystem.

Furthermore, the new model addresses concerns about the Advanced Measurement Approaches (AMA), which have been critiqued for their complexity and lack of compatibility with other methods. The shift towards a standardised model aims to harmonise risk assessment across the industry, setting aside the modeling option that has been a subject of much debate.

Financial institutions are now required to recalibrate their operational risk strategies to align with these changes. Those exceeding a threshold of 750 million Euro in BI are mandated to calculate their operational risk loss, with the potential for waivers if the process is excessively burdensome. This recalibration is not merely a regulatory adjustment but a strategic imperative that necessitates a profound understanding of the new framework's impact on operational risk management.

In summary, the transformation of operational risk assessment methodologies signals a move towards a more equitable and transparent financial environment. It calls for a proactive approach from institutions to integrate these changes, ensuring they remain compliant while fortifying their defences against operational risk.