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Title[ Part 2: The First Pillar - Minimum Capital Requirements

Section[ 2. The Standardised Approach103,104

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652.     In 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. The business lines are defined in detail in Annex 8.

653.     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.  It  should  be  noted  that  in  the  Standardised  Approach  gross  income  is measured for each business line, not the whole institution, i.e. in corporate finance, the indicator is the gross income generated in the corporate finance business line.

103 The Committee intends to reconsider the  calibration of the Basic Indicator and  Standardised Approaches when more risk-sensitive data are available to carry out this recalibration. Any such recalibration would not be intended to affect significantly the overall calibration of the operational risk component of the Pillar 1 capital charge.

104 The Alternative Standardised Approach

At national supervisory discretion a supervisor can choose to allow a bank to use the Alternative Standardised Approach (ASA) provided the bank is able to satisfy its supervisor that this alternative approach provides an improved basis by, for example, avoiding double counting of risks. Once a bank has been allowed to use the ASA, it  will not be allowed to revert to  use  of the Standardised Approach  without the  permission of  its supervisor. It is not envisaged that large diversified banks in major markets would use the ASA.

Under the ASA, the operational risk capital charge/methodology is the same as for the Standardised Approach except for two business lines — retail banking and commercial banking. For these business lines, loans and advances — multiplied by a fixed factor ‘m’ — replaces gross income as the exposure indicator. The betas for retail  and commercial banking are unchanged from  the Standardised Approach. The ASA operational risk capital charge for retail banking (with the same basic formula for commercial banking) can be expressed as:

where

KRB is the capital charge for the retail banking business line

?RB is the beta for the retail banking business line

LARB is total outstanding retail loans and advances (non-risk weighted and gross of provisions), averaged over the past three years

m is 0.035

For the purposes of the ASA, total loans and advances in the retail banking business line consists of the total drawn  amounts  in  the  following  credit  portfolios:  retail,  SMEs  treated  as  retail,  and  purchased  retail receivables. For commercial banking, total loans and advances consists of the drawn amounts in the following credit portfolios: corporate, sovereign, bank, specialised lending, SMEs treated as corporate and purchased corporate receivables. The book value of securities held in the banking book should also be included.

Under the ASA, banks may aggregate retail and commercial banking (if they wish to) using a beta of 15%. Similarly, those banks that are unable to disaggregate their gross income into the other six business lines can aggregate the total gross income for these six business lines using a beta of 18%, with negative gross income treated as described in paragraph 654.

As  under  the  Standardised  Approach,  the  total  capital  charge  for  the  ASA  is  calculated  as  the  simple summation of the regulatory capital charges across each of the eight business lines.

654.     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. ¹⁰⁵

However, where the aggregate capital charge across all business lines within a given year is negative, then the input to the numerator for that year will be zero. ¹⁰⁶ The total capital charge may be expressed as:

where:

KTSA    =   the capital charge under the Standardised Approach

GI1-8   =   annual  gross  income  in  a  given  year,  as  defined  above  in  the  Basic

Indicator Approach, for each of the eight business lines

?1-8     =   a fixed percentage, set by the Committee, relating the level of required capital to the level of the gross income for each of the eight business lines. The values of the betas are detailed below.

                        Business Lines                                     Beta Factors

                        Corporate finance (?1)                        18%

                        Trading and sales (?2)                         18%

                        Retail banking (?3)                             12%

                        Commercial banking (?4)                  15%

                        Payment and settlement (?5)             18%

                        Agency services (?6)                           15%

                        Asset management (?7)                      12%

                        Retail brokerage (?8)                          12%

105 At national discretion, supervisors may adopt a more conservative treatment of negative gross income.

106 As under the Basic Indicator Approach, if negative gross income distorts a bank’s Pillar 1 capital charge under the Standardised Approach, supervisors will consider appropriate supervisory action under Pillar 2.

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