Competent authorities shall assess an institution's standards relating to expected losses, as referred to in point (a) of Article 322(2) of Regulation (EU) No 575/2013, by confirming that where the institution calculates the AMA own funds requirements only in relation to unexpected losses, it complies with at least the following requirements:

1. (a)

   that the institution's methodology for the estimate of expected losses is consistent with the operational risk measurement system for the estimate of the AMA own funds requirements that comprises both expected losses and unexpected losses, and that the expected loss estimation process is done by operational risk category and is consistent over time;

2. (b)

   that the institution defines the expected loss using statistics that are less influenced by extreme losses, including median and trimmed mean, especially in the case of medium- or heavy-tailed data;

3. (c)

   that the maximum offset for expected loss applied by the institution is bound by the total expected loss and that the maximum offset for expected loss in each operational risk category is bound by the relevant expected loss calculated according to the institution's operational risk measurement system applied to that category;

4. (d)

   that the offsets the institution allows for expected loss in each operational risk category are capital substitutes or that they are otherwise available to cover expected loss with a high degree of certainty over the one-year period;

5. (e)

   that where the offset is something other than provisions, the institution limits the availability of the offset to those operations with highly predictable, stable and routine losses;

6. (f)

   that the institution does not use specific reserves for exceptional operational risk loss events that have already occurred as expected loss offsets;

7. (g)

   that the institution clearly documents how its expected loss is measured and captured, including how any expected loss offsets meet the conditions outlined in points from (a) to (f).

Competent authorities shall assess an institution's standards relating to correlation, as referred to in point (d) of Article 322(2) of Regulation (EU) No 575/2013, by confirming that where the institution calculates the AMA own funds requirements by recognising less than full correlation across individual operational risk estimates, it complies with at least the following requirements:

1. (a)

   that the institution carefully considers any form of linear or non-linear dependence, relating to all the data, either to the body or to the tail, across two or more operational risk categories or within an operational risk category;

2. (b)

   that the institution supports its correlation assumptions, to the greatest extent possible, on an appropriate combination of empirical data analysis and expert judgement;

3. (c)

   that losses within each operational risk category are independent of each other;

4. (d)

   that where the condition of point (c) is not met, dependent losses are aggregated together;

5. (e)

   that, only where neither of the conditions of points (c) or (d) can be met, dependence within the operational risk categories is appropriately modelled;

6. (f)

   that the institution carefully considers dependence between tail events;

7. (g)

   that the institution does not base the dependence structure on Gaussian or Normal-like distributions;

8. (h)

   that all assumptions regarding dependence used by the institution are conservative given the uncertainties relating to dependence modelling for operational risk, and that the degree of conservatism used by the institution increases as the rigour of the dependence assumptions and the reliability of the resulting own funds requirements decrease;

9. (i)

   that the institution properly justifies the dependence assumptions it uses and that it regularly performs sensitivity analyses with the view to assessing the effect of the dependence assumptions on its AMA own funds requirements.