Section 293 of the Solvency Regulation (as of 01.01.2007)

Combination with the Basic Indicator Approach or the Standardised Approach

(1) Upon application and subject to approval from BaFin, an institution may use an Advanced Measurement Approach for some of its organisational units and for the others either the Basic Indicator Approach or the Standardised Approach to calculate the capital requirement for operational risk (partial use).

(2) The organisational units whose capital requirement for operational risk is calculated using the Basic Indicator Approach or the Standardised Approach shall be demarcated by the institution's internal organisational structure, the regulatory business lines or legal entities from the organisational units whose capital requirement for operational risk capital is determined using an Advanced Measurement Approach.

(3) Authorisation for partial use requires compliance with the following conditions:

1. all operational risks of the institution are captured by the capital requirement for operational risk calculated under partial use, and

2. the requirements for the Advanced Measurement Approach and Standardised Approach have been met for those organisational units whose capital requirement for operational risk is determined using the respective approach.

(4) ¹The institution shall show in the application for authorisation that it captures a significant part of its operational risk already using the Advanced Measurement Approach first-time. ²The application for authorisation shall also contain a timetable documenting that the institution will be using the Advanced Measurement Approach to calculate the capital requirement for operational risk for most parts of its business activities by five years at the latest after authorisation is granted. ³An implementation plan for the ongoing rollout of the Advanced Measurement Approach after authorisation is granted shall be agreed with BaFin. ⁴An immaterial part of the business may remain exempt from the rollout of an Advanced Measurement Approach. ⁵A capital requirement for operational risk for said immaterial part of its business activities shall be determined, in agreement with BaFin, either by an appropriate procedure within the framework of the Advanced Measurement Approach or using the Basic Indicator Approach or Standardised Approach.

(5) ¹In substantiated individual cases, BaFin may, upon application, exempt an institution from applying subsection (4). ²The exemption may be revoked if there is a lasting change in the circumstances substantiating the exemption.

(6) ¹The institution shall be allowed to include new organisational units in the Advanced Measurement Approach with the approval of BaFin. ²Unforeseen changes to the degree of coverage, especially owing to mergers or hiving-off of business lines in which the Advanced Measurement Approach was already being used, shall be notified to Bafin and a new timetable shall be submitted.

Explanatory comments (as of 31.10.2007)

On subsection (1)

Subject to the conditions of section 293 of the Solvency Ordinance and after receiving authorisation from BaFin (see also section 278 (5)), partial use of an AMA in combination with either the BIA or the STA is possible within an institution, a group of institutions or a financial holding group. Any application for authorisation must be filed by the institution or superordinated undertaking for the group of institutions or financial holding group. Appropriate management of operational risks has to be introduced even in those organisational units which are initially not included in the AMA, and its quality must as a minimum meet the Minimum Requirements for Risk Management (Circular 18/2005).

If the procedure used for the group of institutions or financial holding group at the group level is different from that used to determine the capital requirement at the individual level, this is not considered to be a partial use. Consequently, it is possible to use an Advanced Measurement Approach for the purpose of section 10a of the Banking Act (KWG) and a simpler approach for subordinated companies at the individual level.

In order to prevent institutions using an STA and then switch to an AMA at a later date being put at a disadvantage to institutions that switch directly from the BIA to the AMA, pursuant to section 269 (5) of the Solvency Ordinance the authorisation application for the AMA may include within it a request to switch to the BIA. BaFin will check whether the calculation of the STA capital requirement for those parts of the institution not covered by the AMA represents a considerable additional burden and will, if necessary, authorise the changeover to the BIA for that part of the institution. The adequacy of the risk management will form part of that examination.

On subsection (2)

The selection of the criterion for demarcating those areas which use an Advanced Measurement Approach from those areas which use a different approach is left to the discretion of the applicant. The demarcation is to be made in such a way that all areas are captured by it. The relevant indicator must be determined for the demarcated areas in accordance with the provisions of the Solvency Ordinance.

On subsection (4)

Notwithstanding the provisions of subsection (5), the Advanced Measurement Approach is to be used from the very beginning for managing a significant proportion of operational risks. The Advanced Measurement Approach is to be used to determine the capital requirement for operational risk for most of an institution's business by no later than five years after authorisation has been granted. A rollout plan for the wider introduction of the AMA has to be agreed with the BaFin. A minor portion of the institution's business may remain outside the scope of the AMA.

The Supervisory Authority examines and decides whether the present scope of the Advanced Measurement Approach and that planned in the foreseeable future is sufficiently large and whether the capital requirement covers the whole of the applicant's operational risk. In its authorisation application, the applicant must demonstrate that the requirements of subsection (4) are met. To that end, the applicant must estimate, by means of suitable indicators, the amount of its total operational risk and that proportion of it which is measured by the Advanced Measurement Approach. In its authorisation application the applicant must determine the ratio of the operational risk measured by the Advanced Measurement Approach to its total operational risk using the relevant indicator or any other suitable indicator (e.g. number of employees, general administrative expenditure or economic capital).

The Supervisory Authority will assess whether the requirements of subsection (4) sentences 1 to 4 are met as part of the authorisation examination. To guide it in its assessment, the Supervisory Authority will make use of thresholds. The applicant will have to demonstrate, by means of the relevant indicator or any other suitable indicator (e.g. number of employees, general administrative expenditure or economic capital) that it does achieve the required thresholds. For the minimum degree of coverage that has to be achieved at the implementation – covering a significant proportion of the institution's operational risk – the Supervisory Authority will take as its yardstick a threshold of 50%. The Supervisory Authority will also take as a yardstick a mid-way threshold and a threshold for the final degree of coverage. In order to assess the minimum degree of coverage to be achieved after 5 years – covering most of the institution's business – the Supervisory Authority will take as its yardstick a mid-way threshold of 80%. In order to assess whether only an immaterial portion of the institution's business remains outside the scope of the AMA, the Supervisory Authority will take as its yardstick a threshold of 95%, which has to be achieved within 10 years at the latest, and in doing so, all material operational risks must be covered by the AMA.

Minority shareholdings are not recognised for the purpose of determining the thresholds, even if they are consolidated in the pro rata aggregation method (section 10a (11) of the Banking Act).

In the case of minority shareholdings, for the purpose of determining the capital requirement at the group level under partial use, irrespective of the approach used in the subordinated undertaking, its capital requirement for operational risk may be consolidated on a pro rata basis in the aggregation method. If the institution being consolidated does not have to hold any regulatory capital of its own by virtue of the application of section 2a of the Banking Act (waiver), for the purpose of consolidation in the aggregation method a capital requirement for operational risk still has to be determined, however. To this end, the institution can either use its own relevant indicator or determine its own risk measurement with the Advanced Measurement Approach. In the latter case it does not contradict the use test for the Advanced Measurement Approach if this risk measurement cannot be used for controlling operational risks at the superordinated level but is only used for the risk management of the minority shareholding. If the necessary data are not available, a capital deduction pursuant to section 10a (13) of the Banking Act will be necessary.

Once an Advanced Measurement Approach has been introduced for all material business activities, a capital requirement will have to be determined in consultation with the Supervisory Authority for the remaining business activities. This can be determined in the form of AMA capital add-ons or in any other appropriate manner in the AMA model if this calculation is more risk-sensitive than using the relevant indicator for these areas. A capital requirement for this area may be determined with a Basic Indicator or Standardised Approach on a permanent basis.

On subsection (5)

In well-founded cases an institution may, upon request, be exempted from the application of subsection (4).

Such cases may be well-founded especially if the introduction of the Advanced Measurement Approach in a subordinated undertaking being consolidated in accordance with section 10a of the Banking Act is disproportionate or impossible for reasons of law or fact. Minority shareholdings are to be treated in accordance with the explanatory comments on subsection (4).