Since 1 January 2007, institutions have been able to choose between the two more simple approaches, namely the Basic Indicator Approach and the Standardised Approach, when calculating their capital requirements. Since 1 January 2008, institutions have also been allowed to use advanced measurement approaches for their calculations. Until 31 December 2013, the German Solvency Regulation (Solvabilitätsverordnung – SolvV) was applicable, which was – to a great extent – replaced by the CRR on 1 January 2014, which in turn is directly applicable to the institutions. The remaining parts of the new SolvV are now transposing the provisions of the CRD IV into national law.

Simple approaches

The two more simple calculation approaches are based on income statement items which form the relevant indicator. Under the Basic Indicator Approach, 15% of the three-year average of the relevant indicator equals the capital requirement, provided that the annual figures for the relevant indicator were positive for the last three years. Otherwise, only the positive annual figures for the relevant indicator are averaged with the number of positive years.

The Standardised Approach, on the other hand, is based on a more sophisticated methodology. Here, the relevant indicator must be mapped to eight regulatory business lines and multiplied by a percentage rate set for each business line (12%, 15%, 18%). These calculated partial capital charges for one year are then added together, whereby the negative values for business lines may be offset against the positive values for business lines within the year. The annual figures calculated in this manner represent the capital requirement by adding up the positive annual figures for the last three years and dividing them by three.
When using the Alternative Standardised Approach, the normalised income indicator may be determined using the relevant indicator to calculate the partial capital charges for certain business lines. This normalised income indicator is calculated by multiplying the total nominal amount of credits and loans and advances of the institution with a factor of 0.035.

Notification procedure when opting to use the Standardised Approach

The use of the Standardised Approach (TSA) is only subject to the notification requirement. The normalised income indicator, on the other hand, may only be used in the Alternative Standardised Approach as a special feature of the TSA upon application and subject to prior permission from the supervisors. Additionally, the use of the TSA always requires that certain qualitative requirements be met. The use of the Basic Indicator Approach is permissible without notifying the supervisors beforehand.

Advanced Measurement Approach

An Advanced Measurement Approach (AMA) may also be used to calculate the capital requirement for operational risk. The AMA stands for all methods of identifying, measuring, monitoring, reporting and treating operational risk. The institutions' AMA must pass an approval examination by the supervisors before it may be used.