Standardised approach may receive op risk charge cut, says ECB official

The operational risk charge related to the Basel II ‘standardised approach’ may be cut in the third consultative paper (CP3) due for release next month by the Basel Committee on Banking Supervision, according to Panagiotis Strouzas, a senior expert in the financial supervision division in the European Central Bank’s Directorate of Financial Stability and Supervision.

Strouzas, a panellist at the Professional Risk Managers’ International’s (Prmia) inaugural 2003 European Summit in Paris today, described Congressional testimony by US officials earlier this year that indicated only a dozen or so US banks would adopt Basel II, as politically motivated. He said the matter was raised at a recent G7 summit and the indications following that meeting were that adjustments to the standardised approach in CP3 would likely address US concerns.

Strouzas said he had seen the results of the third quantitative impact study (QIS3) and believed the Basel Committee had largely achieved the correct credit risk weighting. But he added that a reduction of operational risk charges for the standardised approach would be reduced to make it more attractive for banks around the world – and particularly in the US – to move from the current Basel I capital Accord to the Basel II standardised approach. It is unclear by how much this operational risk will be reduced, but it will be a factor by which the volume of loans of the bank is multiplied instead of the current proposal related to a multiple of gross income. This will be at the discretion of individual national regulators, said Strouzas.

The treatment of operational risk has been a thorny issue for international regulators, with a number of industry participants claiming that efforts to take established quantitative analysis techniques in market risk and apply it to operational risk is unrealistic.

Banks can implement Basel II via three methods: the most complex is the so-called internal-ratings based approach; the standardised approach is an intermediate-level implementation; and the other option is the ‘basic approach’, which largely draws on the existing Basel I capital requirement definitions. The Basel Committee on Banking Supervision – the body developing the Basel II infrastructure – has a stated objective to reward banks with more sophisticated risk management practices.