Standardized Measurement Approach Extension to Integrate Insurance Deduction into Operational Risk Capital Requirement

20 Pages Posted: 29 Nov 2017

Date Written: November 28, 2017

Abstract

The consultative document issued by the Basel Committee on Banking Supervision (BCBS) in March 2016 proposes the withdrawal of internal modeling for operational risk regulatory capital and describes the new proposed methodology for calculating operational risk capital requirement: the standardized measurement approach (SMA). One of the main problems with the SMA is that it does not allow the inclusion of insurance coverage as capital requirement deduction. As a direct consequence, the SMA offers no incentives to invest in insurance coverage in order to keep the risk profile under control. Even the incentive to invest in other mitigation actions is reduced, since forward-looking components are not considered and it takes several years to significantly affect the SMA capital requirement through loss reduction. This paper describes a possible proposal to extend the SMA to include insurance coverage. The operational risk capital-at-risk (OpCaR) model, probably the same one used to calibrate the SMA, is a natural choice for integrating insurance coverage into the extended SMA. The OpCaR model is defined and used by regulators, and it can be easily implemented by all banks, as it is clearly described in the BCBS consultative paper “Operational risk: revisions to the simpler approaches”.

Keywords: advanced measurement approach (AMA), insurance, loss distribution approach, operational risk, standardized measurement approach (SMA)

Suggested Citation

Piacenza, Fabio and Belloni, Claudia, Standardized Measurement Approach Extension to Integrate Insurance Deduction into Operational Risk Capital Requirement (November 28, 2017). Journal of Operational Risk, Vol. 12, No. 4, 2017. Available at SSRN: https://ssrn.com/abstract=3078728

Fabio Piacenza (Contact Author)

UniCredit S.p.A. ( email )

Piazza Gae Aulenti 3
Milan, 20154
Italy

Claudia Belloni

UniCredit S.p.A. ( email )

Piazza Gae Aulenti 3
Milan, 20154
Italy

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