The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS), which specify the criteria that Competent Authorities need to take into account before granting institutions permission to use advanced measurement approaches (AMA) for calculating their capital requirements for operational risk. These RTS are part of the overall review of internal models undertaken by the EBA and are part of the Authority's efforts to harmonise practices for the approval of internal models in the area of credit, market and operational risk models across the EU banking sector. These RTS will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector across the European Union.
These draft RTS detail the assessment methodology to be used by Competent Authorities for operational risk AMA models. In particular, they specify the qualitative and quantitative criteria that institutions are to meet before they can be granted permission to use AMA internal models for calculating their capital requirements to cover operational risk. Through periodic reviews and material model extensions, Competent Authorities shall also assess that institutions maintain the prescribed requirements through time.
These RTS also lay down criteria for the supervisory assessment of the key methodological components of the operational risk measurement system. They ensure this methodology effectively captures banks' actual and potential operational risk, is reliable and robust in generating AMA regulatory capital requirements and is comparable across institutions.
In addition, these RTS provide common standards for the supervisory assessment of a bank's operational risk governance with respect to the role and responsibilities of the operational risk management function and the reporting system and establish criteria for the supervisory assessment of banks' data quality and IT systems, the requirements and terms for an institution to use its AMA in the running of its business (‘use test') and the terms and the scope of audit and internal validation of the AMA framework.
Feedback received during the public consultation period has also been taken into account by the EBA when finalising these standards. In particular, clarifications and amendments have been introduced to clarify the scope of operational risk, as well as the scope of operational risk loss, the treatment of fraud losses in the credit area and the perimeter of conduct risk events.
Legal basis and next steps
The proposed draft RTS have been developed according to Article 312 (4)(a), which mandates the EBA to specify the assessment methodology under which Competent Authorities permit institutions to use advanced measurement approaches. Once into force, these RTS will replace the following CEBS guidelines currently in place:
Section 4.3 and annexes IV and V of the Guidelines on the Implementation, Validation and Assessment of Advanced Measurement (AMA) and Internal Ratings Based (IRB) Approaches (GL-10 CEBS, issued in 2006);
The Compendium of Supplementary Guidelines on implementation issues of operational risk (GL-21 CEBS, issued on September 2009);
The Guidelines on Operational Risk Mitigation Techniques (GL-25 CEBS, issued on 22 December 2009).