March 19, 2010, 15:23 CET
Basel II
Application to use the IRB Approach
On 26 June 2004, the Basel Committee for Banking Supervision has passed a new framework for calculating the minimum capital requirements. On 14 July, the European Commission subsequently published a draft Directive to transfer the capital standards within the EU with binding effect on all credit institutions and institution groups.
From 1 January 2007, institutions and groups of institutions will be permitted to calculate their minimum capital requirements for credit risk on the basis of their own internal estimates of risk components. Prior approval from the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) is required.
Supervisors (BaFin and Deutsche Bundesbank) are expecting a large number of applications for approval. Institutions interested in applying an IRB Approach to determine their regulatory minimum capital requirements need to cooperate closely with banking supervisors in order to obtain timely approval. Given the limited resources available to BaFin and the Bundesbank for examining applications, institutions are asked to apply as soon as possible, yet not before fulfilling the supervisory requirements for internal rating systems. Applications are generally processed on a first-come, first-served basis. The submitted documentation on rating systems should be complete, well-structured and meaningful in order to ensure that applications can be examined as efficiently as possible.
Since December 2004 supervisors have been completely prepared to accept applications for approval to use an IRB Approach to avoid congestion in the month before the new capital rules come into force. For early applications, the necessary examination process can be conducted and completed in such a timely manner that institutions will be able to obtain IRB approval by the requested date for those rating systems regarded as suitable.
On this website you find guidelines containing detailed explanations of the application and the application process as well as the forms which are required for application (Implementation plan, Checklists). The checklists will be readapted in accordance with the further development of the EU Directive as well as with its transfer in national law.
AMA approval procedure
German credit institutions may forthwith submit applications for approval to use the Advanced Measurement Approach (AMA) for operational risk to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or BaFin).
Operational risk measurement approaches are contained in the now-adopted Capital Requirement Directive (CRD), which translates the new Basel Framework for credit institutions’ capital standards into EU law. Basel II envisages three procedures by means of which institutions may determine the minimum amount of capital needed to cover operational risk. From 2007, institutions will be able to choose between the Basic Indicator Approach and the Standardised Approach.
From 2008, institutions will also be able to use the most sophisticated measurement approach, the AMA. All institutions need approval from BaFin for this. The Bundesbank and BaFin will, among other things, conduct on-site audits to ensure that the conditions for approval to use operational risk modelling methods are met.
To streamline the process, German banks will not be required to undergo an approval procedure for the more simple Standardised Approach. Institutions may use this approach after having conducted a successful self-assessment and confirmed this in writing to BaFin.
Any credit institutions that have neither been given approval to use an AMA nor have issued notification of the use of the Standardised Approach will use the Basic Indicator Approach.
Operational risk denotes the danger of a bank sustaining losses resulting from failed internal processes and systems, human error or through the impact of external events on banking operations.
- Notice on changes to models used in Advanced Measurement Approaches (AMA)
- Instructions for completing the AMA requirements list
- AMA requirements list
- Guidelines for applications to use an Advanced Measurement Approach for operational risk
"Bundesbank/BaFin Translation - The present English text is furnished for information purposes only. The original German text is binding in all respects"
Notice on the use of the standardised approach to operational risk
According to the provisions of the EU directives which have now been approved by the European Parliament amending Directive 2000/12/EC and Directive 93/6/EEC for the purposes of determining the minimum capital adequacy requirements, institutions can apply a basic indicator approach or the standardised approach to operational risk from 1 January 2007 and an advanced measurement approach from 1 January 2008.
As of now, German credit institutions can declare their intention to use a standardised approach to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) and apply to use an alternative indicator in the fields of corporate and retail banking business. The reporting arrangements for the standardised approach are explained in the Notice on the use of a standardised approach (german only), as is the process for approving the use of an alternative indicator. A Notice with instructions for approving the advanced measurement approach was published on 17 October 2005.
Institutions may use the standardised approach once an internal review has indicated that the necessary conditions have been fulfilled for the standardised approach and the intention to use this approach has been reported to the Federal Financial Supervisory Authority. An advice of execution is not necessary. The fulfilment of the conditions for using the standardised approach must be documented in such a way that it can be verified. The standardised approach questionnaire (german only) is to be seen as a guide for documenting the internal review.
The use of an alternative indicator in the standardised approach (alternative standardised approach) requires the prior approval of the Federal Financial Supervisory Authority. Proof of compliance with additional criteria laid down in the Notice on the use of a standardised approach is necessary for this. To ensure that they obtain approval for the use of an alternative indicator in good time, insitutions must submit their applications in reasonable time prior to the date on which they intend to start using the alternative standardised approach.
The following documents dated 04 June 2007 are revised/updated versions of the documents dated 13 June 2006 thate were previously published here:
Bundesbank/BaFin Translation - The present English text is furnished for information purposes only. The original German text is binding in all respects.
