MBNA Europe Bank Limited Basel II Compliance Pillar 3 Disclosures

Transcription

1 MBNA Europe Bank Limited Basel II Compliance Pillar 3 Disclosures

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3 Contents 1 Background Risk management Scope and application of Banking Consolidation Directive requirements Capital resources Internal Capital Adequacy Assessment Process (ICAAP) Credit Risk Concentration Risk Interest Rate Risk Liquidity Risk Currency Risk Securitisation Risk Business Risk and Strategic Risk Operational Risk...12

4 1 Background 1.1 Purpose of this document This document sets out the Basel II, Pillar 3 disclosures that apply to MBNA Europe Bank Limited (EBL), a European Economic Area (EEA) parent institution that is a subsidiary group of Bank of America Corporation (BAC). 1.2 Regulatory background The international standards in banking supervision are set by the Basel Committee on Banking Supervision (Basel Committee) which has published a revised international capital adequacy framework (Basel II) that enhances the risk-sensitivity of the existing capital framework. The concepts and rationale of Basel II are set out in three pillars: Pillar 1: Minimum Capital Requirements, Pillar 2: Supervisory Review and Pillar 3: Market Discipline. This document addresses the disclosure requirements of Pillar 3, as they apply to EBL, in accordance with the implementation rules and guidance introduced by the Financial Services Authority (FSA). 1.3 Impact of EBL s relationship to its ultimate parent entity on the disclosures Under the FSA s rules, as an EEA parent institution, EBL must provide Pillar 3 disclosures on a consolidated basis from 2008 onwards. This is earlier than US regulatory requirements, which require EBL s ultimate parent entity to comply by The US Regulatory Agencies require EBL s ultimate parent entity to implement the Advanced Internal Ratings-Based Approach for Credit Risk and the Advanced Measurement Approach for Operational Risk. However, this is not required for EBL under the FSA rules and all disclosures in this document are made on the Standardised basis for Credit Risk and Operational Risk. 1.4 Timing and effective date EBL will publish Pillar 3 disclosures at least annually based on the financial year-end, 31 December. Disclosures in this document are made as of 31 December The disclosures process is subject to continuous monitoring and management will update the disclosures in the event of a relevant material change to EBL s circumstances. The disclosures in this document are primarily qualitative in nature. Quantitative disclosures will be published as soon as practicable in All Pillar 3 disclosures will be published on BAC s corporate website. 1.5 Authorisation The Pillar 3 Disclosures have been subject to appropriate internal review, validation and authorisation procedures but have not been independently audited. 2 Risk management EBL has adopted the risk management processes and methods of its parent entity, adapted to its own needs and experience. 2.1 Processes and methods EBL has established control processes and methods to align risk taking and risk management throughout the organisation. These control processes and methods are designed around three lines of defence: 2

5 2.1.1 Business unit The business units are the first line of defence. Each business unit is responsible for identifying, quantifying, mitigating and managing all risks within their business area. They make and execute their business plans and are closest to the changing nature of risks Support functions The key elements of the second line of defence are the risk, compliance, finance, technology, human resources, legal, information security and business continuity functions. These groups are independent of the lines of business and are organised on both a line of business and enterprise-wide basis Internal audit and Customer Credit Review Internal audit and Customer Credit Review act as the third line of defence in support of the first two. They are responsible for performing independent reviews and tests to ensure that appropriate controls over risk are in place and functioning properly. EBL uses various methods to manage risk at the line of business levels, including risk committees, policies, key risk indicators (KRIs), limits and models. As part of the risk management framework EBL has developed a Top Down Risk Profile process to identify the key risks to which EBL is currently exposed, analysed across the Basel II risk categories. The potential impact, severity and likelihood of each risk are agreed with executive management. Key risks are summarised quarterly via the Line Of Business Self- Assessment which is reported internally within BAC. Effective risk management is also dependent on the corporate culture and the actions of EBL s employees. The Code of Ethics provides a framework for all employees to conduct themselves with the highest integrity in the delivery of products and services to customers. EBL instils a risk-conscious culture through communications, training, policies, procedures, organisation roles and responsibilities and its performance management program. 2.2 Risk governance EBL s Board of Directors and its Chief Executive Officer oversee the management of risk through a number of Board and executive management committees covering governance, risk management, compliance and finance. These committees are staffed by a crosssection of executive and senior management from relevant EBL business units European Risk Committee The EBL Global Risk Committee is a management committee responsible for independently reviewing and challenging legal and regulatory updates, the risk profile and internal audit reports. The committee also receives updates from the Legal, Compliance and Operational Risk Committees and the European Credit Risk Committee Basel Board Sub-Committee (BBSC) The BBSC is an EBL Board sub-committee that oversees and approves all documentation and actions on behalf of EBL in pursuit of Basel II compliance, including the review of all documents and actions. This includes validation of EBL s Pillar 1 approach, review and challenge of financial performance and position against plan, review and challenge of the annual EBL Internal Capital Adequacy Assessment Process (ICAAP), recommending approval of the ICAAP to the Board and making recommendations to the Board as to the timing of the ICAAP, reviewing and challenging of ICAAP quarterly dashboard, reviewing and challenging the changes in the risk profile and stress testing, deciding if there is a need to update or refresh the Economic Downturn Scenario, approving the annual risk 3

6 stress tests and their mitigating actions, approving the annual Economic Downturn Scenario and its mitigating actions; and reviewing, challenging and approving the Pillar 3 disclosures European Finance Committee The European Finance Committee is an EBL Board committee that is responsible for managing Securitisation, Liquidity, Currency and Interest Rate Risk Risk Strategy Committee The Risk Strategy Committee is a management committee that reviews and authorises proposed business strategies. For each initiative the Committee considers risk assessment, selection criteria, Basel II impact and Treating Customers Fairly. Major initiatives may also require approval the EBL Operations Committee and by the Card Services Compliance and Operational Risk Committee (CORC) Compliance and Operational Risk Committee The Compliance and Operational Risk committee is an executive level committee that is responsible for ensuring compliance with legal and regulatory requirements, overseeing the management of regulatory exams, ensuring an effective Operational Risk framework exists, approving policies and procedures, ensuring effective anti-money laundering and fraud procedures exist and ensure effective business continuity, information security and supply chain management processes exist and ensuring compliance and Operational Risk issues are resolved in a timely manner European Credit Risk Committee The European Credit Risk Committee is an executive level committee that is responsible for reviewing the economic environment in each country, reviewing the asset quality of each portfolio, reviewing KRIs, approving and ensuring compliance with Credit Risk standards, ensuring compliance with model governance, and ensuring Credit Risk issues are resolved in a timely manner. 3 Scope and application of Banking Consolidation Directive requirements 3.1 Holding company In May 2008 the group structure of EBL, the regulated entity, was altered, with the creation of a new holding company, Europe Card Services Partners (Scotland) Limited Partnership. This entity is currently the highest level of consolidation for the group and forms the basis of the consolidated reporting completed for the FSA. EBL is the key trading company in this group and sits under Europe Card Services Partners (Scotland) Limited Partnership which is owned by FIA Card Services, N.A. 3.2 Consolidation basis EBL publish audited financial statements in respect of the EBL group. These are prepared under UK generally accepted accounting policies (UK GAAP). The financial information of the group, for statutory reporting purposes incorporates the assets, liabilities and results of EBL and its subsidiaries. These subsidiaries include special purpose entities (SPEs). Some of the SPEs have accounting year-ends that are noncoterminous with the group. Due to the nature of these entities, it is not practicable to align the year-ends with the group and hence these subsidiaries are consolidated on the basis of financial information made up to 31 December. 4

7 For prudential reporting purposes these SPEs and the assets which have been sold to them as part of the securitisation process are deemed to be off-balance sheet under the rules of BIPRU 9 and are therefore not included in the consolidated prudential reporting of EBL. 3.3 Consolidated entities All subsidiaries of EBL, excluding securitisation entities and dormant companies, are included in its consolidated prudential reporting. There are no impediments to the prompt transfer of capital resources to or from EBL group companies. EBL has made use of a soloconsolidation waiver granted by the FSA in respect of a number of its subsidiary legal entities. The table below lists all subsidiary entities and highlights their consolidation and solo-consolidation status as at 31 December Entity Name Fully Consolidated Solo Consolidated Securitisation Entity Dormant Shell Company Main Group 1 MBNA Europe Bank Limited x x 2 MBNA Property Services Limited x x 3 MBNA Direct Limited x x 4 MBNA Europe Funding Plc x x 5 MBNA International Properties Limited x x 6 Paneldeluxe Company Limited x x 7 Mainsearch Company Limited x x 8 Windeluxe Company Limited x x 9 Chester Property & Services Limited x x 10 MBNA Europe Holdings Limited x x 11 MBNA Receivables x x 12 MBNA Europe Finance Limited x x 13 MBNA R&L Sarl x x x 14 MBNA Global Services x x India 15 MBNA Indian Services Private Limited x x PCL 16 Vendcrown Limited x x 17 Premium Credit Limited x x 18 Premium Credit Receivables Limited x x Loans.co.uk 19 Marlin House Holdings x x 20 Loans.co.uk x x Ireland 21 MBNA Dublin Properties Limited x x 22 MBNA Ireland x x Securitisation vehicles 23 CARDS 11 Plc x x x 24 CARDS 12 Plc x x x 25 CARDS 2001 A Plc x x x 26 CARDS 2001 B Plc x x x 27 CARDS 2002 A Plc x x x 28 CARDS 2002 B Plc x x x 29 CARDS 2003 A Plc x x x 30 CARDS 2003 B Plc x x x 31 CARDS 2003 C Plc x x x 32 CARDS Plc x x x 33 Chester Asset Receivables Dealings VFN Limited x x x 34 Chester Asset Receivables Dealings VFN2 Limited x x x 35 Chester Asset Receivables Dealings VFN3 Limited x x x 36 Chester Asset Securitisa ions Holding VFN Limited x x x 37 Chester Asset Securitisations Holdings Limited x x x Jersey Companies (only filed in Jersey) 38 Deva One x x x 39 Deva Two x x x 40 Deva Three x x x 41 Credit Card Securitisation International Limited x x x 42 Credit Card Securitisation Europe Limited x x x Jersey companies (with UK branch reg) 43 Chester Asset Receivables Dealings Issuer Limited x x x 44 Chester Asset Securitisation Holdings No. 2 Limited x x x Dormant 45 MBNA Investment and securities Limited x x x 46 Direct Debit Management Services x x x 47 Debt Clear recoveries & Investigations Limited x x x 48 Aarco 106 Limited x x x 49 Research Europe Limited x x x 50 Chester Asset Options Limited x x 51 Chester Asset Options No. 2 Limited x x 52 MBNA Two Limited x x 53 CARDS 5 Limited x x 54 CARDS 10 Limited x x x x 5

8 4 Capital resources The capital structure of EBL consists of Tier 1 and Tier 2 capital only. EBL s Tier 1 capital is share capital, profit and loss reserves and current year profit / loss, reduced by goodwill and intangible assets. EBL s Tier 2 capital is made up of general provisions, capped at 1.25% of risk weighted exposures. 5 Internal Capital Adequacy Assessment Process (ICAAP) The ICAAP process considered all risks relevant to EBL along with the forward looking economic scenario focussed on the UK Credit Card business. All unsecured lending businesses within EBL are managed in a similar way when considering key risks and growth opportunities. The ICAAP has been designed to ensure capital levels: Are sufficient to support the group s risk profile. Exceed management and regulatory capital requirements. Can withstand a severe economic downturn. EBL has adopted The Standardised Approach for both Credit Risk and Operational Risk in line with the methodology of its ultimate parent entity for non-us entities. EBL holds capital for the following risks: Credit Risk; Operational Risk; Interest Rate Risk; Concentration Risk; and Securitisation Risk. A Pillar 1 Plus approach has been developed using a detailed assessment of the risk profile of EBL and a comparison with coverage of the Pillar 1 calculation. The detailed risk assessment has included individual stress testing of key risks and a bank-wide 1 in 25 year Economic Downturn Scenario analysis. For the purposes of calculating risk weighted exposure amounts in accordance with The Standardised Approach to Credit Risk, EBL has opted to use Moody s and Standard and Poor s external ratings. These agencies are used to provide the required credit quality assessment in accordance with BIPRU 3 for the Central Banks and Institutions exposure classes. 6 Credit Risk Credit Risk is the risk related to the inability of a customer, client or other party to meet its repayment obligations under previously agreed terms and conditions. 6.1 Objective EBL s objective is to ensure credit risk and reward is being effectively managed within the risk appetite approved by the Board. 6.2 Policies EBL manages Credit Risk in accordance with the following policies: The Judgmental Lending Policy assesses the likelihood that a customer will repay. It focuses on three components: ability, stability and willingness. The Strategy Approval Memo Policy ensures correct documentation, authorisation and notification to business and support areas of new or changed processes which directly or indirectly affect customers of EBL. Credit Risk management is considered as part of strategy approval. 6

9 The Model Risk Control Policy mitigates Credit Risk by ensuring continuous improvement of credit model development and governance. This diminishes the risk of material financial loss, inaccurate financial or regulatory reporting, or damage to the EBL s reputation. 6.3 Risk management EBL has an executive level Credit Risk Committee that approves and provides oversight of the Credit Risk framework. The Committee oversees and approves adherence to sound Credit Risk management policies and practices including analysis of portfolio risk and reward, economic overview, reviewing and approving compliance with Credit Risk policies and standards, ensuring effective model and strategy governance and reviewing Credit Risk stress tests for Basel compliance. The Credit Risk Committee is supported by monthly Asset Quality Meetings to ensure Credit Risk is effectively managed thereby achieving the right risk and reward balance in each portfolio. Day to day management of Credit Risk is undertaken by dedicated Credit Risk management functions in both the first and second line of defence. Key elements of the Credit Risk framework within EBL include loss monitoring and forecasting, portfolio reporting and risk assessment, issue tracking, risk self-assessment, top-down risk profiling, economic trend analysis, and risk and reward assessments. In addition, statistical techniques in conjunction with experiential judgment are used in all aspects of Credit Risk management including the assessment of product pricing, setting credit limits, operating processes and metrics to quantify the balance of risk and return. Credit Risk is monitored throughout the application lifecycle. The refinement of existing and implementation of new strategies ensures that Credit Risk is mitigated in line with the Board s risk appetite. 6.4 Risk mitigation Key Credit Risk issues for each country are reported to the head of European Credit Risk to ensure that mitigating actions in each product line are consistently managed to align with the overall risk appetite. If the performance of the portfolio, typically delinquency and the resultant loss performance, is outside of stated quality standards, then risk mitigation strategies would be considered for implementation as deemed appropriate by management to address the concern. The expected action would be proportionate to the degree to which performance had, or was forecast to deviate from, the agreed standards set by the Board. 6.5 Provisioning methodology For accounting purposes, EBL defines any account with payment overdue as past due; and balances for which a provision is made as impaired. A full description of EBL s provisioning methodology can be found in Note 1 to EBL s Annual Report for the year ended 31 December Concentration Risk Concentration Risk is the risk arising from a lack of diversification in EBL s business. 7.1 Objective The objective of Concentration Risk management is to ensure that risk is identified and managed through assessing the horizontal diversification within unsecured lending. Product diversification is limited on the EBL portfolio as it has a monoline business model specialising in unsecured lending. From a geographical perspective, the majority of EBL s assets are concentrated in the UK market, ahead of the Spanish and Irish markets. 7

10 7.2 Policies Concentration Risk management is fully incorporated into Credit Risk policies. 7.3 Risk management Each geographic market has a region specific Credit Risk manager who undertakes all key Credit Risk management processes. Their local knowledge and experience enables immediately highlighting of region specific risks for prompt management action. The geographic concentrations for the UK portfolio, in which the majority of EBL s assets lie, are managed through frequent analysis on the distribution of balances within each UK region and are assessed for risk at a regional performance level. The risk arising from the exposure to large credit lines is also considered as a customer Concentration Risk and this risk is managed from the point of acquisition. EBL s acquisition, account management and risk detection practices focus on overall customer exposure and any large exposure that is seen as a risk can be cancelled unconditionally by EBL. 7.4 Risk mitigation Economic trends are reviewed on a regular basis to ensure that emerging economic and regional risks are proactively managed by all lines of business and addressed through appropriate strategy implementations. 8 Interest Rate Risk Interest Rate Risk is the exposure to income of an adverse movement in market interest rates. 8.1 Objective EBL s objective is to manage Interest Rate Risk so that movements in interest rates do not adversely affect core Net Interest Income. Consumer lending creates interest rate sensitive positions on the balance sheet that give rise to Interest Rate Risk exposure. 8.2 Policies Interest Rate Risk is managed in accordance with EBL s Asset and Liability Management Policy. This policy sets down the risk management procedures and hedging strategies EBL may adopt in relation to the management of Interest Rate Risk. 8.3 Risk Management EBL s Treasury function is responsible for managing EBL s Interest Rate Risk in accordance with the objectives set by the European Finance Committee and the policy guidelines. EBL manages its Interest Rate Risk by measuring the gap between the repricing of assets and liabilities on its Sterling and Euro balance sheets. EBL s policy is that the cumulative one year static gap in the balance sheet of its Sterling and Euro denominated balance sheet should not breach +/-15% or +/-30% respectively. EBL stresses these Balance Sheets using an immediate 200 basis point shock. EBL relies on a variety of measurement techniques in assessing Interest Rate Risk, including: Measuring the sensitivity of Net Interest Income to changes in interest rates. Performing maturity gap analysis. Performing simulations to estimate the impact on core Net Interest Income on a managed basis using interest rate scenarios. 8

11 On a monthly basis, EBL along with BAC Treasury will review the gap analysis of repricing / maturity of assets and liabilities. The funding book will be positioned accordingly so as to match fund the asset portfolio. Although ECS has a loan portfolio and consequently exposure to loan prepayment risk, this is considered immaterial in the context of EBL s business as a whole. 8.4 Risk Mitigation In order to maintain the level of Interest Rate Risk within the established limits, management may, with the European Finance Committee's concurrence, use a variety of financial instruments and strategies. These include: Cash Market Strategies: This includes offsetting risk by the acquisition of cash market instruments or debt that bear risk inverse to that of an existing or prospective cash position. Hedging Strategies: This includes the use of other financial instruments products to hedge specific assets and liabilities and to hedge macro balance sheet mismatches. 9 Liquidity Risk Liquidity Risk is the risk that a firm, although solvent, either does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can only secure such resources at excessive cost. This also extends to the ability of the firm to utilise its assets in order to provide liquidity when needed at a reasonable cost. 9.1 Objective EBL s objective in relation to Liquidity Risk is to ensure that it has sufficient financial resources available to enable it to meet its obligations as they fall due in accordance with regulatory guidelines and management policy. 9.2 Policies Liquidity Risk is managed in accordance with EBL s Liquidity Policy. This policy sets down the risk management procedures and strategies EBL may adopt in relation to the management of Liquidity Risk. EBL is also subject to BAC s Liquidity Policy and its Liquidity Guideline Structure for entities outside the US. 9.3 Risk Management The European Finance Committee is responsible for establishing, implementing and maintaining adequate liquidity risk management guidelines including effective guidelines for liquidity risk assessment. It is responsible for managing this risk by monitoring the ongoing ability of EBL to meet this requirement, which it does through establishing liquidity policy as well as approving operating and contingency procedures. EBL Treasury is responsible for liquidity management on a day to day basis and during crisis management subject to BAC s Liquidity Policy. Daily analysis is carried out as to the size and nature of all assets and liabilities held by EBL against all contractual cash inflows and outflows. 9.4 Risk mitigation EBL forms part of the BAC contingency funding plan. Relevant indicators are used to signal any approaching crisis and actions outlined in the Liquidity Policy are used to preempt it. 9

12 10 Currency Risk Currency Risk is the risk of loss from an adverse movement in exchange rates Objective EBL s objective is to manage the impact that foreign exchange exposure has on earnings, capital, and risk management Policies Currency exposure is managed to within pre-determined regulatory thresholds Risk management The European Finance Committee is responsible for monitoring currency exposure. Day to day monitoring of currency exposure is performed by EBL Finance with hedging activity performed by EBL Treasury. EBL has no trading book and is only subject to the Foreign Exchange Position Risk Requirement under Pillar Risk mitigation All foreign currency debt or investment transactions are fully hedged. 11 Securitisation Risk Securitisation Risk is the risk that capital resources held by EBL in respect of assets that have been securitised are inadequate with regard to the economic substance of the transaction, including the degree of risk transfer achieved Objective EBL s objective in relation to Securitisation Risk is to significantly transfer the Credit Risk associated with the relevant assets and therefore reduce its Credit Risk capital requirement. The two key performance indicators are the three month average Excess Spread levels and Sellers Interest which must be maintained above contractual thresholds to avoid early amortisation. This would result in the recognition of securitised transactions on the balance sheet which has a consequential impact on EBL s capital and net income Policies Securitisation activity is undertaken in accordance with EBL s Asset Sales, Participations and Financing Policy. EBL has two securitisation trusts: UK Receivables Trust (UKRT) and UK Receivables Trust II (UKRTII) Risk management EBL acts as the transferor, the servicer and the cash manager of the revolving exposures in UKRT. EBL acts as the transferor, the transferor beneficiary, the servicer and the cash manager of the revolving exposures in UKRTII. EBL has sub-participated the risks and rewards of the transferor in UKRT to FIA Card Services and therefore only acts as the servicer for these exposures. EBL is only involved in traditional securitisations and is not involved in any synthetic securitisations. The European Finance Committee oversees securitisation trust performance and compliance with policies and procedures that ensure effective management of Securitisation Risk. Day to day management of the Securitisation Risk is delegated to EBL s Treasury function. All new securitisation transactions are reviewed and approved by EBL s Board and the Corporate Treasury Structured Finance group. 10

13 EBL applies the rules and guidance detailed in the FSA handbook BIPRU 9 to calculate the risk weighted exposure amounts under the Standardised Approach to Credit Risk Risk mitigation EBL monitors the factors that influence satisfactory account performance, including underlying asset performance, and can implement procedures designed to ensure the business generates a sufficient amount of performing assets on its own balance sheet that can be transferred to the trust in order to enhance Seller s Interest should the need arise Accounting for securitisation transactions The company s securitisation SPEs fall within the definition of legal subsidiaries contained within the Companies Act Consequently these companies are required to be consolidated under the provisions of FRS 2 Accounting for Subsidiary Undertakings. The income and expenses of the securitisation subsidiaries, and the securitised loans and related non-recourse proceeds of securitisation, are therefore reported using separate presentation in the consolidated financial statements. Securitisation transactions are treated as sales and no gain is recognised on the sale. Loan servicing fees, including loan interest income and fees in excess of interest paid to beneficiaries, credit losses and other expenses, are recognised by the company as part of fees and commissions receivable over the life of the transaction. Transaction and issue costs are deferred and amortised over the revolving period of the transaction as a reduction of fees and commissions receivable. 12 Business Risk and Strategic Risk Strategic Risk and Business Risk are closely linked: Business Risk is the risk to earnings or expense arising from adverse planning for or improper implementation of business decisions. This includes consideration of the impact of external events, including macroeconomic uncertainty and industry change, on future earnings and costs. Strategic Risk represents any diversion away from the corporate plan or risk appetite due to changes in the environment or because management is unable to deliver the strategy as intended Objective Management s objective in relation to Business and Strategic Risk is to ensure business decisions are planned and implement effectively in support of the achievement of business objectives Policies EBL manages Business and Strategic Risk in accordance with the Strategy Approval Memo Policy and EBL s strategy governance procedures. The policy and procedures ensure all strategy initiatives are properly documented, authorised and notified to relevant business and support areas. No strategy may be implemented without prior authorisation in accordance with this policy Risk management The Risk Strategy Committee is a management committee that reviews and authorises proposed business strategies. For each initiative the Committee considers risk assessment, selection criteria and regulatory impact. The Committee is supported by a number of Risk Strategy Working Groups (RSWGs) organised along product lines. The RSWGs review and authorise proposed strategies on behalf of EBL Executive Group (EG). 11

14 Major initiatives may also require approval at EG and by CORC after approval by the Risk Strategy Committee. 13 Operational Risk Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including Legal Risk Objective EBL ensures it identifies, measures, mitigates and monitors operational risks that could prevent us from achieving our business objectives Policies EBL manages Operational Risk in accordance with the following policies: Enterprise Risk Management Framework: This sets down the organisation s commitment to effective risk management and describes its risk management framework and organisation. Operational Risk Management Policy: This sets down the responsibilities and processes for operational risk management Risk management EBL has an executive level Legal, Compliance and Operational Risk Committee that approves and provides oversight of the Operational Risk framework. Key elements of the Operational Risk framework within EBL include process risk universe, risk selfassessment, top-down risk profiling, KRIs, operational loss event data capture, compliance monitoring, issue tracking and related policies, procedures and training. EBL also uses specialised support groups, such as Information Security, Human Resources, Fraud, and Business Continuity, to develop risk management practices Risk mitigation The objective of risk mitigation at EBL is to ensure that risk levels stay within tolerance limits and to achieve an appropriate balance between risk and reward. Risk mitigation can take the form of acceptance, reduction, transfer or transformation. To achieve this, the Operational Risk function liaises with the business management to ensure the appropriate risk mitigation strategy is considered and implemented on a timely basis Approach to the assessment of Operational Risk capital requirement EBL has used The Standardised Approach to calculate the Pillar 1 requirement and identified the operational risks facing EBL, for stress testing using a top down and bottom up approach. EBL s Compliance and Operational Risk Committee approved the operational risks to be stress tested. The output of the stress tests, after taking into consideration any correlation benefit, was compared to the Pillar 1 capital requirement for Operational Risk to determine whether additional capital should be held. 12