From the Regulators

The proposed revisions would introduce a single, standard that methodology that would make calculations more comparable

By James Langton |

The Basel Committee on Banking Supervision is proposing a new standardized approach to accounting for operational risk that utilizes a single, standard methodology and does away with internal modeling as it aims to simplify and harmonize banks' regulatory capital calculations.

Specifically, the Basel Committee issued a set of proposed revisions on Friday to the way banks calculate operational risk as part of their capital requirements, which aims to make the calculations simpler and more comparable between banks, while also remaining risk sensitive.

The Basel Committee reports that its review of banks' existing operational risk modelling practices and the capital results they produce revealed that the current approach is too complex and varies too widely between banks.

"The lack of comparability arising from a wide range of internal modelling practices have exacerbated variability in risk-weighted asset calculations and eroded confidence in risk-weighted capital ratios," the Basel Committee states, adding that this has resulted in "insufficient levels of capital for some banks."

To address these concerns, the proposals would introduce a single standardized approach to calculating operational risk capital, doing away with the three existing standardized approaches, and eliminating the option for banks to use internal models for operational risk in a bid to "significantly [simplify] the regulatory framework."

The revised methodology aims to remain risk sensitive by combining a financial statement-based measure of operational risk with individual firms' past operational losses.

"This results in a risk-sensitive framework, while also promoting consistency in the calculation of operational risk capital requirements across banks and jurisdictions," the Basel Committee states.

"The proposals are an important step toward completing the post-crisis reforms during the current year," says Stefan Ingves, chairman of the Basel Committee and governor of Sveriges Riksbank, in a statement.

"For most banks, the committee expects that these proposals will have a relatively neutral impact on capital," he adds. "While the objective of these proposals is not to significantly increase overall capital requirements, it is inevitable that minimum capital requirements will increase for some banks."

The Basel Committee is seeking comments on the proposals, which are due by June 3.