Response to consultation on draft Regulatory Technical Standards on assessment methodologies for the Advanced Measurement Approaches for operational risk
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However, in our opinion, the definition of “first party fraud” is not sufficiently clear, we suggest to use the definition contained in the “Instructions for Basel III monitoring”.
The problem is the amount to be included.
Suppose that an old client with a lot credit product in his portfolio (for example a mortgage, a bank loan, a long term loan, a current account) committed a fraud event. The fraud event only affects a specific credit product and not the whole portfolio. We cannot consider all the products of the client portfolio as an operational loss.
We suggest to change the article 8 (1) regarding the recorded loss amount:
“in case of fraud events in the credit area, the total outstanding amount OF THE CREDIT PRODUCT INVOLVED IN THE FRAUD EVENT at the time or after the discovery of the fraud (whole write-off amount, total credit loss) and any other related expenses, such as interest in arrears and legal fees”.
Frequently opportunity cost/loss revenues and uncollected revenues are caused by business strategies or commercial practices that are not included within the scope of operational risk. Consequently it’s very difficult or even impossible to identify the operational loss and to properly quantify the loss amount.
However these losses are mainly commercial and not operational losses.
Frequently voluntary decisions to refund a costumer or uncollected revenues are an opportunity cost that institutions decide to bear for business strategy or commercial practice that are not included within the scope of operational risk. Consequently it’s very difficult or even impossible to identify the operational loss and to quantify the correct loss amount. However these losses are mainly commercial and not operational losses.
Furthermore we have to consider that the branches have a limited decisional autonomy of refunding, so they can manage only events of negligible loss.
Consequently we suggest to change the article 4 (3.c) into:
“refunds to customer caused by operational events, before the costumer can lodge a complaint but after an institution has been required to refund other costumers for the same event”.
We suggest also to change the article 7 (1.e) into:
“ RELEVANT uncollected revenues related to contractual obligations with third parties, such as the decision to compensate a client following the operational risk event, rather than by a reimburse or direct payment through a revenue adjustment waiving or reducing contractual fees for a specific future period of time”.
Q2: Do you support the treatment under an AMA regulatory capital of fraud events in the credit area, as envisaged in Article 6? Do you support the phase-in approach for its implementation as set out in Article 48?
We support the treatment under an AMA regulatory capital of fraud events in the credit area and the phase-in approach.However, in our opinion, the definition of “first party fraud” is not sufficiently clear, we suggest to use the definition contained in the “Instructions for Basel III monitoring”.
The problem is the amount to be included.
Suppose that an old client with a lot credit product in his portfolio (for example a mortgage, a bank loan, a long term loan, a current account) committed a fraud event. The fraud event only affects a specific credit product and not the whole portfolio. We cannot consider all the products of the client portfolio as an operational loss.
We suggest to change the article 8 (1) regarding the recorded loss amount:
“in case of fraud events in the credit area, the total outstanding amount OF THE CREDIT PRODUCT INVOLVED IN THE FRAUD EVENT at the time or after the discovery of the fraud (whole write-off amount, total credit loss) and any other related expenses, such as interest in arrears and legal fees”.
Q3: Do you support the collection of ’opportunity costs/loss revenues‘ and internal costs at least for managerial purposes, as envisaged in Article 7(2)?
We don’t support the collection of “opportunity cost/loss revenues and internal cost for managerial purposes”. In some cases it’s very difficult identify the losses or a part of the total loss for the collection.Frequently opportunity cost/loss revenues and uncollected revenues are caused by business strategies or commercial practices that are not included within the scope of operational risk. Consequently it’s very difficult or even impossible to identify the operational loss and to properly quantify the loss amount.
However these losses are mainly commercial and not operational losses.
Q4: Do you support the items in the lists of operational risk events in Articles 4, 5 and 6, and the items in the list of operational risk loss in Article 7? Or should more items be included in any of these lists?
We don’t completely support the items in the list of operational risk events in article 4, and the items in the list of operational risk loss in article 7.Frequently voluntary decisions to refund a costumer or uncollected revenues are an opportunity cost that institutions decide to bear for business strategy or commercial practice that are not included within the scope of operational risk. Consequently it’s very difficult or even impossible to identify the operational loss and to quantify the correct loss amount. However these losses are mainly commercial and not operational losses.
Furthermore we have to consider that the branches have a limited decisional autonomy of refunding, so they can manage only events of negligible loss.
Consequently we suggest to change the article 4 (3.c) into:
“refunds to customer caused by operational events, before the costumer can lodge a complaint but after an institution has been required to refund other costumers for the same event”.
We suggest also to change the article 7 (1.e) into:
“ RELEVANT uncollected revenues related to contractual obligations with third parties, such as the decision to compensate a client following the operational risk event, rather than by a reimburse or direct payment through a revenue adjustment waiving or reducing contractual fees for a specific future period of time”.