Regulatory Alerts2013-12-11 | BSD/DIR/CIR/GEN/LAB/06/053/6Guidance Notes on the Calculation of Capital Requirement for Operational Risk: Basic Indicator Approach (BIA) and the Standardized Approach (TSA)
The BCBS 239 standardised approach is a method for calculating the minimum amount of capital that banks need to hold against their credit risk, market risk, and operational risk. This approach consists of three steps: (1) calculation of the relevant indicator by business line; (2) multiplying each relevant indicator by a specific factor; and (3) summing up all weighted factors, offsetting any positive amounts with negative ones if applicable. If the total result for a year is negative, it should be set equal to zero. The final step involves calculating the Standardised Approach amount for each of the three years considered, taking their simple average as the overall capital requirement. This method allows for consistent capital requirements across different types of banks and jurisdictions while also addressing various risks that could potentially affect a bank's stability. It is essential for ensuring financial institutions are well-capitalized and able to absorb potential losses without threatening their solvency or jeopardizing the stability of the financial system. In this context, Annex B provides an example of how the capital requirement could be calculated using the standardised approach. This involves applying the specified factors to each business line's relevant indicators and summing them up before calculating the Standardised Approach amount for each year and finally determining the overall capital requirement as the simple average of these amounts. It is crucial to remember that this method only serves as a minimum requirement, and banks may hold more capital than what is required by the standardised approach depending on their risk appetite, business strategy, or specific regulatory requirements in their jurisdiction. Moreover, banks must also ensure they have adequate liquidity resources to meet their obligations and fund any unexpected losses that might arise from their operations.