Erscheinung:05.11.2008 | Topic Own funds OpR Expert Group recommendation on the treatment of expected loss in the AMA (of 05.03.2008)
Preliminary remark
In its mandate the OpR Expert Group set itself the task of drawing up proposals for how the latitude that exists in the national implementation of the Basel and Brussels rules on operational risk might be utilised. The following Expert Group recommendation is a suggestion for treatment of expected loss in determining the capital requirement for operational risk in an AMA. The recommendation is subject to its being consistent with the decisions taken at the European level.
Please note:German version is binding
This translation is furnished for information purposes only and may refer to an older version of the text. The original German text is binding in all respects.
Section 284 of the Solvency Regulation (as of 01.01.2007)
Quality of the measurement system
(2) 1The capital requirement for operational risk calculated by using an Advanced Measurement Approach shall include both expected and unexpected loss. 2Insofar as the institution determines the expected loss appropriately and proves that it takes a portion of the expected loss adequately into account in its internal business practices, BaFin will authorise it to reduce the capital requirement for operational risk by that portion of the expected loss.
Explanatory comments
As matter of general principle, it is possible for the capital requirement for operational risk to be reduced by a portion of the expected loss, hereinafter referred to as "deductible expected loss". The amount of deductible expected loss must not exceed the mean of the loss distribution from which the capital requirement for operational risk is determined. The amount of deductible expected loss must be properly predictable on the basis of historical data, determined consistently with the AMA measurement system and stable over time, provided there is no material change in the institution's operational risk.
The capital requirement for operational risk is allowed to be reduced by deductible expected loss only if the institution demonstrates that it can capture this portion of expected loss in its business practices as reliably as it can with capital backing. If future income is used to cover future deductible expected loss calculated for the same period, the institution must in particular ensure and document that this income will be available with an adequate degree of probability and that it is intended to use it in the prescribed way.
Provisions are generally created for losses arising from loss events that have already occurred which have not yet impacted on cashflow but the amount of which can already be estimated. Such provisions cannot be used to cover future expected loss. Similarly, for the purposes of determining the capital requirement for operational risk, the estimated losses arising from loss events that have already occurred which will impact on cashflow in the future must not be captured directly, but only indirectly as (estimated by amount) historical internal loss data. As a matter of general principle, provisions can be used to cover future expected loss only if they were made for probable future loss events which have not yet occurred.
Methods and techniques for determining deductible expected loss must be adequately documented. In particular, it must be clear from the documentation how the bank ensures that the aforementioned conditions for deductibility are met.
