Response to consultation on draft Regulatory Technical Standards on assessment methodologies for the Advanced Measurement Approaches for operational risk
Go back
The inclusion of data relating to control failure is always to be encouraged. However, the validation of such data and its value to a bank must be clear. The inclusion of direct hard costs such as costs directly linked to the event that hit the P&L are the most obvious and easiest data to validate. Hard indirect costs such as overtime or bonuses are also relatively easy to identify and, once linked to the appropriate event, can be easily verified. Hard indirect costs such as lost revenues can be analysed and a reasonably accurate picture deduced, although there are a number of inevitable assumptions. The soft indirect costs such as opportunity costs or not-meeting-budget costs are the most difficult to validate, although arguably the most useful for management in terms of the true cost of the event.
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?
Yes, we do support the treatment and we found the analysis very helpful. We support the phasing-in of this treatment, as set out in Article 47.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)?
Whilst we cautiously support the collection of ’opportunity costs/loss revenues‘ and internal costs at least for managerial purposes, we recognise that this is a significant ongoing task. Although a number of banks do currently collect this data, it is inevitably very ‘soft’ data and difficult to adequately validate. The inclusion of such difficult-to-assess data invites regulatory misperception. Words such as ‘appropriate’ and ‘proportionate’ should be emphasised in such a paragraph.The inclusion of data relating to control failure is always to be encouraged. However, the validation of such data and its value to a bank must be clear. The inclusion of direct hard costs such as costs directly linked to the event that hit the P&L are the most obvious and easiest data to validate. Hard indirect costs such as overtime or bonuses are also relatively easy to identify and, once linked to the appropriate event, can be easily verified. Hard indirect costs such as lost revenues can be analysed and a reasonably accurate picture deduced, although there are a number of inevitable assumptions. The soft indirect costs such as opportunity costs or not-meeting-budget costs are the most difficult to validate, although arguably the most useful for management in terms of the true cost of the event.
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 support the concept of the lists and indeed the items in the lists. It would have been helpful to have also referred to and analysed Basel loss event types, level three examples, in relation to the operational risk events in Articles 4, 5 and 6, where applicable. This would have given further significant guidance.Q5. Do you support that the dependence structure between operational risk events cannot be based on Gaussian or Normal-like distributions, as envisaged in Article 26 (3)? If not, how could it be ensured that correlations and dependencies are well-captured?
We support this point as we agree that copulas generally are inappropriate for operational risk modelling. The data in operational risk are not suited to copula and we believe that it will also be difficult to apply a T-Student copula for the same reason, other than a bank that has substantial loss data. Even if substantial loss data exists, the structure of the copula is fatally undermined by the paucity of the qualitative data, which is correctly required by Basel for AMA modelling.Q6: Do you support the use of the operational risk measurement system not only for the calculation of the AMA regulatory capital but also for the purposes of internal capital adequacy assessment, as envisaged in Article (42)(d)?
We strongly support Articles 43 and 44. The same model used for the calculation of the AMA regulatory capital should also be used for internal capital purposes. However, there may be differences in the data as management may wish to model more inclusive data (e.g. to include strategic, reputational and business risk data) for internal capital purposes.Upload files
EBA CP response v2 16-07-14.doc
(78.5 KB)