Sigor to recalibrate TSA betas for operational risk capital

Rumours that regulators will be recalibrating the TSA betas have been proven true

The Basel Committee on Banking Supervision's Standards Implementation Group on Operational Risk (Sigor) has launched a quantitative impact study (QIS) exercise to re-examine whether the capital calculations for operational risk – the alpha under the basic indicator approach (BIA) and the betas under the standardised approach (TSA) – need to be reformed.

The Basel II Accord states that the Basel Committee always intended to reconsider the calibration of both approaches "when more risk-sensitive data was available". The issue was first mooted after the publication of the results from the Basel Committee on Banking Supervision's 2004 loss data collection exercise (LDCE). At the OpRisk Europe conference in London in April 2008, statistical analysis of data from the LDCE by the Boston Federal Reserve Board pointed to the possibility of re-evaluating betas used in the standardised approach for certain categories. Rumours that regulators were looking to reform the betas surfaced again in June 2009 but were quickly quashed by regulators.

However, as the 2008 LDCE threw up lower-than-expected capital numbers for operational risk, the call for more empirical evidence has now been launched with the latest Basel QIS. "The bottom line is that the capital levels for operational risk are nowhere near the level envisioned and this needs to be addressed," says one regulatory source.

Another problem the QIS addresses is how else to calibrate the betas instead of using gross income within each business line. "Regulators had the idea that operational risk capital would be in the region of 10% of revenue, in reality it is lower than that," says one banker. "The problem is how else to measure it. Some suggestions are head counts, costs or/and volumes."

The issue is looked at more fully in the April issue of Operational Risk & Regulation and will also be discussed by Patrick de Fontnouvelle, vice-president, supervision and regulation department, at the Federal Reserve Bank of Boston, and Andrew Sheen, manager, operational risk policy team, at the UK Financial Services Authority, on a panel at OpRisk USA to be held in New York on March 25. Full details of that panel discussion will be covered in the May issue of Operational Risk & Regulation.