Standardized approach (operational risk)

Bank regulation and standards

* Bank for International Settlements
* Basel Accords (Basel I, Basel II, Basel III, Basel IV)
* Financial Stability Board

Background

* Banking (Regulation)
* Monetary policy
* Central bank
* Risk
* Risk management
* Regulatory capital
* Tier 1
* Tier 2

Pillar 1: Regulatory capital

* Credit risk
* Standardized
* IRB Approach
* F-IRB
* A-IRB
* PD
* LGD
* CCF
* EAD
* Operational risk
* Basic
* Standardized
* AMA
* Market risk
* Duration
* Value at risk

Pillar 2: Supervisory review

* Economic capital
* Liquidity risk
* Legal risk

Pillar 3: Market disclosure

* Disclosure

Business and Economics Portal

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In the context of operational risk, the standardized approach or standardised approach is a set of operational risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions.

Basel II requires all banking institutions to set aside capital for operational risk. Standardized approach falls between basic indicator approach and advanced measurement approach in terms of degree of complexity.

Based on the original Basel Accord, under the Standardised Approach, banks’ activities are divided into eight business lines: corporate finance, trading & sales, retail banking, commercial banking, payment & settlement, agency services, asset management, and retail brokerage. Within each business line, gross income is a broad indicator that serves as a proxy for the scale of business operations and thus the likely scale of operational risk exposure within each of these business lines. The capital charge for each business line is calculated by multiplying gross income by a factor (denoted beta) assigned to that business line. Beta serves as a proxy for the industry-wide relationship between the operational risk loss experience for a given business line and the aggregate level of gross income for that business line.

Business Line | Beta Factor

|

Corporate finance | 18%
Trading and sales | 18%
Retail banking | 12%
Commercial banking | 15%
Payment and settlement | 18%
Agency services | 15%
Asset Management | 12%
Retail Brokerage | 12%

The total capital charge is calculated as the three-year average of the simple summation of the regulatory capital charges across each of the business lines in each year. In any given year, negative capital charges (resulting from negative gross income) in any business line may offset positive capital charges in other business lines without limit.

In order to qualify for use of the standardised approach, a bank must satisfy its regulator that, at a minimum:

* Its board of directors and senior management, as appropriate, are actively involved in the oversight of the operational risk management framework;
* It has an operational risk management system that is conceptually sound and is implemented with integrity; and
* It has sufficient resources in the use of the approach in the major business lines as well as the control and audit areas.

On March 4, 2016, the Basel Committee on Banking Supervision finally updated its proposal for calculating operational risk capital, introducing the Standardized Measurement Approach (“SMA”). Building upon its 2014 version, the SMA would not only replace the existing standardized approaches, but also the Advanced Measurement Approach. Under the SMA, regulatory capital levels will be determined using a simple formulaic method which facilitates comparability across the industry.[1]

## See also

* Basic indicator approach
* Advanced measurement approach
* Operational risk
* Basel II

## References

1. ↑ "First Take: Basel's Standardized Measurement Approach for Operational Risk". PwC Financial Services Risk and Regulatory Practice, March, 2016. https://www.pwc.com/us/en/financial-services/regulatory-services/publications/basel-operational-risk-proposal-march-2016.html.

* http://www.bis.org/publ/bcbsca.htm Basel II: Revised international capital framework (BCBS)
* http://www.bis.org/publ/bcbs107.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS)
* http://www.bis.org/publ/bcbs118.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision)
* http://www.bis.org/publ/bcbs128.pdf Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework, Comprehensive Version (BCBS) (June 2006 Revision)

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Financial risk and financial risk management

Categories|

| Credit risk|

* Concentration risk
* Consumer credit risk
* Credit derivative
* Securitization

|

Market risk|

* Commodity risk (e.g. Volume risk, Basis risk, Shape risk, Holding period risk]], Price area risk)
* Equity risk
* FX risk
* Margining risk
* Interest rate risk
* Volatility risk
* Liquidity risk (e.g. Refinancing risk)

Operational risk|

* Operational risk management
* Legal risk
* Political risk
* Reputational risk
* Valuation risk

Other|

* Profit risk
* Settlement risk
* Systemic risk

Modeling|

* Market portfolio
* Modern portfolio theory
* RAROC
* Risk-free rate
* Risk parity
* Sharpe ratio
* Sortino ratio
* Value-at-Risk (VaR) and extensions Profit at risk, Margin at risk, Liquidity at risk

Basic concepts|

* Diversification
* Expected return
* Hazard
* Hedge
* Risk
* Risk pool
* Systematic risk
* Financial law

* Financial economics
* Investment management
* Mathematical finance

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