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07 June 2016

WSBI-ESBG response on the standardised measurement approach for operational risk


The World Savings and Retail Banking Group and the European Savings and Retail Banking Group published a joint comment letter on the BCBS consultation on the Standardised Measurement Approach for operational risk.

WSBI-ESBG would like to point out a few inconsistencies, the sometimes existing lack of transparency and gaps that WSBI-ESBG has identified, and which should be addressed by the BCBS:

1. WSBI-ESBG is surprised that the quality of the risk management has no impact on the final capital requirement. This BCBS consultation doesn’t offer any positive reinforcement towards more robust procedures, policies and manuals, which are determinants in an appropriate management of operational risk.

2. WSBI-ESBG would appreciate to get more information about (i) the results and reasons why certain components were used for both the business indicator and the loss component and (ii) the data used and the methodology to obtain calibrations of the SMA. This would increase the transparency and the understanding of the suggested approach. It would also be helpful for the pillar 2 assessments in the ICAAP as the banks would be able to compare the bank’s own risk and capital assessments directly with the foundations for the pillar 1 capital requirement.

3. According to the aforementioned ORX analysis, larger banks would hold proportionally more capital under SMA than smaller ones, indicating the calibration is skewed (“Taken together, bank size appears the biggest determinant of capital levels under the SMA. Larger banks hold proportionally more SMA capital, have the biggest increase beyond current regulatory approved capital, and experience the largest impact from the loss component”).

4. WSBI-ESBG, too, understands the approach that a group, where most of its entities are currently applying AMA, would fall into bucket 1 of the BI component. On the other side, the group seen from the consolidated level would probably reach bucket 3 of the BI component. Consequently, on a local level the loss data collection would not be necessary for a number of entities. What would be the suggested scenario for this constellation?

5. Additionally, with regard to the issue of allocated capital charges per entity (based on consolidated calculation), WSBI-ESBG has been wondering if it should be comparable to stand-alone calculations, and if there are any stand-alone calculations expected.

6. Furthermore, there exists another issue related to groups, in WSBI-ESBG´s view: on a consolidated level, groups can, as described above, end up in bucket 2-5, even if all companies within the group at a solo level will be in bucket 1. That would add a “super-additivity” to a group’s consolidated own funds requirements. The effect is that the group will need to hold capital that is not needed in any single company within the group. Issues regarding the allocation of such capital/own funds requirements will then arise – and not at least an issue regarding how to employ that capital in order to create the necessary return on the capital.

7. The consultative document does not mention deductions in capital requirements related to pro-visions yet accounted in P&L. As far as capital requirements are set to cover unexpected losses, provisions already accounted for should be deducted from the capital consumption, in WSBI-ESBG´s view.

8. The loss component structured by thresholds increases instability by introducing significant increments in the loss component for marginal increases in losses (i.e. a EUR 1 loss increase could increase the loss component by 10%). To avoid this type of jump, a progressive approach should be considered.

9. In the current standard the differences of risk profiles in function of the business lines are captured, while the SMA ignores this and applies the same treatment for all business lines. WSBI-ESBG has difficulties agreeing with this approach as clear differences in risk profiles have been observed in the past.

10. Finally, WSBI-ESBG believes that the BCBS could provide guidance in respect of the treatment of divested business lines. 

Full comment letter



© ESBG


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