BIPRU 6.4 Operational risk: Standardised approach

1. (1)

   To be eligible for the standardised approach, a firm must meet the qualifying criteria set out in this rule, in addition to the general risk management standards set out in SYSC 4.1.1 R to SYSC 4.1.2 R and SYSC 7.1.16 R1.

   1
2. (2)

   A firm must have a well-documented assessment and management system for operational risk with clear responsibilities for the system assigned within the firm. The system must identify the firm's exposures to operational risk and track relevant operational risk data, including material loss data.

3. (3)

   A firm's operational risk assessment and management system must be subject to regular independent review.

4. (4)

   A firm's operational risk assessment system must be closely integrated into the firm's risk management processes. Its output must be an integral part of the process of monitoring and controlling the firm's operational risk profile.

5. (5)

   A firm must implement a system of management reporting that provides operational risk reports to relevant functions within the firm. A firm must have procedures in place for taking appropriate action in response to the information contained in such reports.

   [Note: BCD Article 104(6) and Annex X, Part 2 point 12 (part)]

A firm must comply with the criteria in BIPRU 6.4.1 R having regard to the size and scale of its activities and to the principle of proportionality.

[Note: BCD Annex X, Part 2 point 12 (part)]

Under the standardised approach, a firm must divide its activities into a number of business lines as set out in this section.

[Note: BCD Article 104(1)]

For each business line, a firm must calculate a capital requirement for operational risk as a certain percentage of a relevant indicator, in accordance with the rules in this section.

[Note: BCD Article 104(2)]

The ORCR under the standardised approach is calculated as the three-year average of the yearly summations of the capital requirements 2across the business lines referred to2 in BIPRU 6.4.15 R.

[Note: BCD Annex X, Part 2 point 1 (part)]

In any given year, negative capital requirements (resulting from negative gross income) in any business line may offset positive capital requirements in other business lines without limit. However, where the aggregate of the capital requirements across all business lines within a given year is negative, the input to the numerator for that year must be zero.2

[Note: BCD Annex X, Part 2 point 1 (part)]

The three year average in BIPRU 6.4.6 R must be calculated on the basis of the last three twelve monthly observations at the end of the financial year. When audited figures are not available, business estimates may be used.

[Note: BCD Annex X, Part 2 point 2]

A firm must develop and document specific policies and criteria for mapping the relevant indicator for current business lines and activities into the framework for the standardised approach. The criteria must be reviewed and adjusted for new or changing business activities and risks as appropriate.

[Note: BCD Annex X, Part 2 point 4 (part)]

1. (1)

   The principles for business line mapping that a firm must meet are set out in this rule.

2. (2)

   All activities must be mapped into the business lines in a mutually exclusive and jointly exhaustive manner.

3. (3)

   Any activity which cannot be readily mapped into the business line framework, but which represents an ancillary function to an activity included in the framework, must be allocated to the business line it supports. If more than one business line is supported through the ancillary activity, an objective mapping criterion must be used (e.g., proportional allocation of the indicators).

4. (4)

   If an activity cannot be mapped into a particular business line then the business line yielding the highest charge for the firm must be used. The same business line equally applies to any associated ancillary activity.

5. (5)

   A firm may use internal pricing methods to allocate the relevant indicator between business lines.

6. (6)

   The mapping of activities into business lines for operational risk capital purposes must be consistent with the definitions of business lines used by the firm for credit and market risks.

7. (7)

   Senior management must be responsible for the mapping policy.

8. (8)

   The mapping process to business lines must be subject to independent review.

   [Note: BCD Annex X, Part 2 point 4 (part)]

For the purposes of BIPRU 6.4.11 R (5), costs generated in one business line which are imputable to a different business line may be reallocated to the business line to which they pertain, for instance by using a treatment based on internal transfer costs between two business lines.

[Note: BCD Annex X, Part 2 point 4 (part)]

To be eligible to use the alternative standardised approach, a firm must meet the following conditions, in addition to the general risk management standards set out in SYSC 4.1.1 R to SYSC 4.1.2 R and 1SYSC 7.1.16 R1:

1. (1)

   the firm must meet the eligibility criteria for the standardised approach in BIPRU 6.4.1 R;

2. (2)

   the firm must be overwhelmingly active in retail and/or commercial banking activities, which must account for at least 90% of its income; and

3. (3)

   the firm must be able to demonstrate that a significant proportion of its retail and/or commercial banking activities comprise loans associated with a high probability of default, and that the alternative standardised approach provides an improved basis for assessing the operational risk.

   [Note: BCD Article 104(3) and Annex X, Part 2 points 5 and 8 to 11]

1. (1)

   The relevant indicators under the alternative standardised approach are the same as for the standardised approach except for the two following business lines:

   1. (a)

      retail banking; and

   2. (b)

      commercial banking.

2. (2)

   For retail banking and commercial banking, the ORCR must be calculated as a normalised income indicator equal to the three-year average of the total nominal amount of loans and advances multiplied:

   1. (a)

      by 0.035, and then

   2. (b)

      by the appropriate business line percentage set out in BIPRU 6.4.15 R.

      [Note: BCD Annex X, Part 2 point 6]

For the retail and/or commercial banking business lines, the loans and advances must consist of the total drawn amounts in the corresponding credit portfolios.

[Note: BCD Annex X, Part 2 point 7 (part)]

For the commercial banking business line, the securities held in the non-trading book must also be included.

[Note: BCD Annex X, Part 2 point 7 (part)]