The Basel II accord recommends three methods of calculating the capital that must be set aside. The Basic Indicator Approach requires that banks multiply gross income by a pre-determined percentage to determine the amount of capital to be set aside. The Standardized Approach requires that banks do the same thing, but at the line of business level, where each line of business may have a different pre-determined percentage.
The Advanced Measurement Approach, on the other hand, requires a more complex calculation, but results in a more accurate allocation of capital. The Federal Reserve is requiring that the top 10 US banks comply with Basel II via the AMA, and the next 10 are under a lot of supervisory pressure to do so.
The BPS Suite and the BPS OpRisk solution, combined, can help banks with the determination of capital allocation for the AMA. Whatever the quantitative model used to determine capital allocation, the four elements required in every AMA measurement are supported by BPS:
- Internal Loss Event Data
- External Loss Event Data
- Scenario Analysis Data and
- Bank-specific Business Environment and Internal Control factors (BEICF, which can be interpreted as Key Risk Indicators)
BPS OpRisk’s Loss Events Module supports tracking and storing both internal and external loss data, along with predefined workflows to lead business users through the process of investigating the occurrence of a loss event.
The loss event repository allows for reporting and distinguishing among internal loss events, external data, and scenario-based simulations. Different workflows can be incorporated for different actions and activities required – for example, a structured investigation process should be launched for real, internal loss events; whereas a workshop-based discussion can be held around scenario-based simulations.
The platform can define reports of aggregate loss data across business units, sliced by risks and controls, or over the entire organization. The reporting engine can aggregate internal data only, or a combination of internal, external, and simulated data. These outputs can then be used for trending and analysis in support of the AMA effort.
In addition to supporting Basel II, aggregated loss event data can be used to as an input to understanding which controls in a given environment are failing and why. A collection of loss data is useful in and of itself as a means of understanding overall risk exposure. Using the Platform’s cross-referencing engine, loss events can be linked back to both risks and controls, and then used to inform the risk identification and assessment process for RCSA.
The BPS OpRisk product also provides comprehensive support for key risk indicator tracking, and integration of KRIs within a risk and control framework. Members of KRI Library Services can easily import KRIs into BPS OpRisk and can use the Platform’s cross-referencing engine to link them back to risks, controls, loss events and their associated issues, action plans, assessments or other activities. The KRI repository in BPS considers the location in the organization in which the indicator is relevant – at a managerial level, an executive level, or in between – and can calibrate triggers accordingly. Integration points with existing systems can be implemented to receive and respond to triggers. The combination of all of these capabilities, coupled with a strict exercise in determining the relevant KRIs for an organization, can inform the AMA process in a meaningful way.
