Zhumabekova Kristina Operational risk — the

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Zhumabekova Kristina

Operational risk - the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Includes legal risk, but excludes strategic and reputational risk. Not diversifiable, but can be managed

Employment Practices and Workplace Safety External Fraud Internal Fraud Damage to Physical Assets Business Disruptions And Systems Failure Clients, Products and Business Practices Execution, Delivery and Process Management

Basic Indicator Approach (BIA) Standardized Approach (TSA) Advanced Measurement Approach (AMA)

Based on the original Basel Accord, banks using the basic indicator approach must hold capital for operational risk equal to the average over the previous three years of a fixed percentage of positive annual gross income. The fixed percentage ‘alpha’ is typically 15 percent of annual gross income.

Banks’ activities are divided into eight business lines: corporate finance trading & sales retail banking commercial banking payment & settlement agency services asset management retail brokerage

The calculation is the same as in BIA, except that a different factor is applied to the gross income from different business lines. 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.

Under AMA the banks are allowed to develop their own empirical model to quantify required capital for operational risk. Banks can use this approach only subject to approval from their local regulators. Once a bank has been approved to adopt AMA, it cannot revert to a simpler approach without supervisory approval.

AMA framework must include the use of four data elements: Internal loss data (ILD) External data (ED) Scenario analysis (SBA) Business environment and internal control factors (BEICFs).

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