What does Basel 2 say about operational risk?
What does Basel 2 say about operational risk?
Definition. The Basel Committee defines operational risk in Basel II and Basel III as: The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk.
What is operational risk Basel?
As part of the revised Basel framework,1 the Basel Committee on Banking Supervision set forth the following definition: Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.
What are the regulatory requirements for operational risk capital reserves?
The Basic Indicator Approach (BIA) Under the BIA, banks are required to hold capital for operational risk equal to the average over the previous three years of a fixed percentage (15%) of positive annual gross income (GI).
Which risk is part of Pillar 2?
For example: concerning the first Basel II pillar, only one risk, credit risk, was dealt with easily while the market risk was an afterthought; operational risk was not dealt with at all.
Which risk is part of Pillar 3?
This is probably the most strategic issue that banks will need to consider, as Pillar 3 will considerably increase the volume of public disclosure around risk management, in particular in the areas of credit and operational risk as well as Pillar 2.
What are the limitations of Basel II?
The disadvantages of Basel II Accord revealed by the international crises can be: the internal rating method of risks evaluation is so complex, that is very difficult to be applied by countries in East and Central Europe, the responsibilities for bank supervisors are very high and the capital markets are full of …
What is the difference between Basel I and Basel II?
The key difference between Basel 1 2 and 3 is that Basel 1 is established to specify a minimum ratio of capital to risk-weighted assets for the banks whereas Basel 2 is established to introduce supervisory responsibilities and to further strengthen the minimum capital requirement and Basel 3 to promote the need for …
What are the capital requirements under Basel II?
It requires banks to maintain a minimum capital adequacy requirement of 8% of its RWA. Basel II also provides banks with more informed approaches to calculate capital requirements based on credit risk, while taking into account the asset’s risk profile and specific characteristics. The two main approaches include the:
What is the Basel II framework?
Basel II is the second set of international banking regulations defined by the Basel Committee on Bank Supervision (BCBS). It is an extension of the regulations for minimum capital requirements as defined under Basel I. The Basel II framework operates under three pillars: associated with risk-weighted assets (RWA).
What is the new standardised approach for calculating operational risk capital?
In December 2017, the Basel Committee on Banking Supervision introduced the new standardised approach for calculating operational risk capital charge, which replaces all operational risk approaches under Basel II. Under the new standardised approach, operational risk capital is calculated as follows:
How is the capital charge measured in the Basel framework?
The Basel framework provides three approaches for measurement of the capital charge for the operational risk. The simplest is the Basic Indicator Approach (BIA) which the capital charge is , by calculated as a percentage (alpha) of Gross Income (GI), a proxy for operational risk exposure.
