Operational risk

Part 3 of the Solvency Regulation provides for three alternative methods for calculating the regulatory capital requirements for operational risk:

  • the Basic Indicator Approach (BIA)
  • the Standardised Approach (TSA)
  • the Advanced Measurement Approaches (AMA)

The calculation basis for the BIA and TSA is the three-year average of the "relevant indicator", which is calculated from certain items in the profit and loss account (net interest and net commissions received, the trading result and other operating income). When using the BIA, multiplying the "relevant indicator" by 15% produces the capital charge. The supervisors have to be notified if an institution intends to use the TSA. In order to calculate the capital charge using the TSA, the "relevant indicator" is to be broken down into eight business lines defined in the Solvency Regulation and multiplied by weights ranging between 12% and 18%. Alternatively, an institution that is involved primarily in retail or corporate business, when using the TSA, may, subject to prior approval by supervisors, calculate the capital charge in these business lines by multiplying the nominal credit volume by a prudential factor of 0.035. There are also qualitative requirements to be met when using the TSA. If an institution has been given permission by supervisors to use an AMA, it may, in compliance with qualitative and quantitative supervisory standards, use its own model to calculate its capital requirements. Beforehand, an approval examination must be performed by supervisors. Supervisory approval must be renewed in respect of material changes and extensions to an institution’s internal model.