In our note, we explain that the Committee is pursuing a “hybrid” approach to recognised operational risk capital across jurisdictions for such institutions. Under this hybrid approach, a banking group would be permitted - subject to supervisory approval - to use a combination of stand-alone AMA calculations for significant internationally active banking subsidiaries and an allocated portion of the group-wide AMA capital requirement for its other internationally active subsidiaries. As a consequence: First, a significant, internationally active institution will be expected to calculate its capital needs under the AMA on a stand-alone basis. It will be able to consider a well-reasoned estimate of diversification within its own operations, though not across the rest of its group. Where a significant internationally active institution is a subsidiary of a larger organisation, it will be allowed to rely on resources, data, and parameters calculated at the group level. Second, an institution that is not considered significant could receive approval from its supervisors to apply a capital charge against operational risk that is allocated to it from a group-wide AMA calculation. The principles articulated in the January note are intended to facilitate the implementation efforts. They should, moreover, ease the burden on institutions that adopt the AMA across jurisdictions yet still respect host countries’ laws that may require local subsidiaries to comply with a minimum standard on their own. Achieving this balance should encourage more institutions to improve their management of operational risk and to strive to adopt more advanced approaches as their capabilities grow.
This evolutionary approach requires two things: first, a stable framework which provides certainty for the industry so that the accord is not a moving target; second, enough structured flexibility to be able to adapt to relevant changes in best practices. Schedule With the release of the three papers on unexpected losses, securitisation, and the recognition of operational risk capital across home and host jurisdictions, the Committee has come a long way toward resolving many of the most complicated issues raised in consultations. These revisions to the framework will, moreover, help to ensure that the New Accord is more sensitive to the actual degree of risk that banks face and even more supportive of future improvements in the measurement and management of risk. The Committee’s working groups are refining these and other technical matters in the New Accord and will report their solutions to the Committee by May 2004. That will allow the Committee to meet its goal of resolving outstanding issues by the middle of this year and agreeing on the text of the Accord that will provide a solid basis for national rule-making processes and for the industry’s preparations to continue. Concluding thoughts Over the next two days, you will have an opportunity to discuss and share ideas on the latest risk management practices in the areas of market, credit, operational, and insurance risk. A great deal of what you will discuss has direct relevance to developing and implementing advanced risk management techniques.