In conjunction with changes to the leverage ratio, a new standardized approach (SA) for credit risk, and revisions to the internal-ratings based approach along with a new “output floor,” the Basel Committee has finalized a proposed approach to the operational risk-based capital (ORBC) standards in the Basel II rules.  These track the overall new approach in all of the other “Basel IV” actions in that they circumscribe reliance on internal models – here called the “advanced measurement approach” (AMA) – in favor of supervisory-dictated risk weightings or, for operational risk, a set of quantitative indicators and percentages that determine applicable capital.  The new operational-risk approach directly ties ORBC to a bank’s size and earnings, tempered to the extent a supervisor wishes by historical-loss experience that can raise or lower the basic amount of ORBC mandated by the income-based approach.

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