The newly released Basel 4 standards introduce a single non-model based method for the calculation of OpRisk capital, the Standardised Approach.
In December 2017, the Basel Committee on Banking Supervision (BCBS) finalised the Basel 4 standards and released the final rules on operational risk (OpRisk) capital. The BCBS introduced a new single non-model based method for the calculation of OpRisk capital caled the Standardised Approach (SA). This replaces three existing approaches under Pillar 1 and is due to apply from 1 January 2022.
The main objectives of the BCBS in defining these new rules were to improve comparability and simplicity, but will the SA reduce incentives for robust risk management within the business due to the lack of risk sensitivity? Currently, banks can choose the approach to take for calculating OpRisk capital, with the possibility of capital savings in return for higher investments in risk management. The new SA is much simpler than the current method and as a result is no longer as risk-sensitive. This is likely to reduce the incentive for banks to strengthen their operational risk management. It is therefore critical that banks maintain high quality OpRisk teams, continue key processes such as scenario analysis and modelling risks to assist with business decision making, and embed operational risk management mind-sets into the business.
We analysed the details behind the new approach and assessed how it could have implications on banks' systems and processes, business model and capital. Read the full article for an in-depth analysis, and scenario planning using KPMG's Peer Bank tool to measure impact to bank's capital.
This article is part of our Basel 4: The way ahead discussing the Basel 4 standards. To assess the full impact of these final rules, we are leveraging the insights of our global network to publish a series of articles that focus on specific areas affected by the standards. Find the latest articles online here.