Operational Risk: Supporting Document to the New Basel Capital Accord doc

Basel Committee

on Banking Supervision

Consultative Document

Operational Risk

Supporting Document

to the New Basel Capital Accord

Issued for comment by 31 May 2001

January 2001

Superseded document

Table of Contents

SECTION A: INTRODUCTION ...............................................................................................................1

I. BACKGROUND AND OVERVIEW...............................................................................................1

CAPITAL FRAMEWORK OVERVIEW.....................................................................................................1

II. DEFINITION OF OPERATIONAL RISK .......................................................................................2

DIRECT VS. INDIRECT LOSSES ..........................................................................................................2

EXPECTED VS. UNEXPECTED LOSSES (EL/UL)..................................................................................3

III. GENERAL CONSIDERATIONS ...................................................................................................4

INTERACTION WITH PILLARS 2 AND 3.................................................................................................4

THE CONTINUUM CONCEPT ...............................................................................................................4

ONGOING INDUSTRY LIAISON ............................................................................................................5

SECTION B: APPROACHES..................................................................................................................5

IV. BASIC INDICATOR APPROACH.................................................................................................6

V. STANDARDISED APPROACH ....................................................................................................6

DESCRIPTION OF APPROACH ............................................................................................................6

VI. INTERNAL MEASUREMENT APPROACH..................................................................................8

METHODOLOGY ...............................................................................................................................8

Structure of Internal Measurement Approach ..........................................................................8

Business lines and loss types ..................................................................................................9

Parameters ...............................................................................................................................9

Risk weight and gamma (scaling factor) ................................................................................10

Correlations ............................................................................................................................10

Further evolution.....................................................................................................................10

Key issues ..............................................................................................................................10

LOSS DISTRIBUTION APPROACH (LDA) ...........................................................................................11

VII. QUALIFYING CRITERIA.............................................................................................................11

BASIC INDICATOR APPROACH .........................................................................................................12

THE STANDARDISED APPROACH .....................................................................................................12

Effective risk management and control ..................................................................................12

Measurement and validation ..................................................................................................12

INTERNAL MEASUREMENT APPROACH.............................................................................................13

Effective risk management and control ..................................................................................13

Measurement and validation ..................................................................................................13

SECTION C: REVIEW OF OTHER ISSUES.........................................................................................14

VIII. THE “FLOOR” CONCEPT..........................................................................................................14

IX. OUTSOURCING..........................................................................................................................15

X. RISK TRANSFER AND MITIGATION ........................................................................................15

INSURANCE....................................................................................................................................15

Superseded document

XI. OPERATIONAL RISK MANAGEMENT STANDARDS..............................................................16

ANNEX 1: RECENT INDUSTRY DEVELOPMENTS ...........................................................................18

ANNEX 2: EXAMPLE MAPPING OF BUSINESS LINES.....................................................................19

ANNEX 3: STANDARDISED APPROACH...........................................................................................20

ANNEX 4: BUSINESS LINES, LOSS TYPES AND SUGGESTED EXPOSURE INDICATORS.........23

ANNEX 5: RISK PROFILE INDEX........................................................................................................24

ANNEX 6: LOSS DISTRIBUTION APPROACH...................................................................................26

Superseded document