Review of the Standardized Approach (TSA) for Operational Risk Jermy Prenio Senior Policy Advisor September 2014
Background of the IIF The (IIF) is the global association of the financial industry. Our members include commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks, development banks, as well as professional services firms. Membership currently stands at close to 500 institutions from 70 countries.
IIF Regulatory Affairs Committees and WG Steering Committee on Regulatory Capital Chair: Frédéric Oudéa (Société Générale) Vice-Chair: Chanda Kochhar (ICICI Bank) IIF Board of Directors Special Committee on Effective Regulation Chair: Urs Rohner (Credit Suisse) Working Group on Capital Adequacy Data and IT Issues Working Group Working Group on Market Risk Working Group on Liquidity Working Group on Operational Risk Cross-Border Resolution Working Group Chair: Simon Gleeson (Clifford Chance) Effective Supervision Advisory Group Chair: Vacant Infrastructure Working Group Working Group on Cross-Border Securities Issues Chair: Tim Hailes (JPMorgan) International Consistency Working Group Chair: Andrew Procter (Deutsche) Shadow Banking Advisory Group Chair: Ed Greene (Cleary Gottlieb) Disclosure Working Group Insurance Regulatory Committee Chair: Martin Senn (Zurich Insurance Group) Vice-Chair: Steven Kandarian (MetLife) Senior Accounting Group Chair: Gavin Francis (HSBC) FATCA Working Group Chief Risk Officers Fora LATAM ASIA Insurance Working Group Committee on Governance and Industry Practice Chair: Vacant EMAC Working Group on Regulatory Reform Chair: H. Ersin Ozince (Is Bank) Enhanced Disclosure Task Force Working Group MENA Compensation Advisory Panel Non-Banking Non-Insurance Working Group
Agenda 1. The IIF Working Group on Operational Risk (WGOR) a. History b. Different workstreams c. Interactions with the Basel WGOR 2. Studies produced by the IIF WGOR a. IIF WGOR data collection exercise Background of other similar studies b. The Standardized Approach (TSA) qualitative analysis paper 3. The revised TSA for operational risk what do we know?
Agenda 1. The IIF Working Group on Operational Risk (WGOR) a. History b. Different workstreams c. Interactions with the Basel WGOR 2. Studies produced by the IIF WGOR a. IIF WGOR data collection exercise Background of other similar studies b. The Standardized Approach (TSA) qualitative analysis paper 3. The revised TSA for operational risk what do we know?
The IIF Working Group on Operational Risk (WGOR) History The IIF WGOR has been in place for several years now and was pivotal in the work that led to the development of the Basel II framework for operational risk a decade ago. The group had not been active in the few years after the crisis as global regulatory reforms focused on credit, market and liquidity risk The group was reactivated last year in anticipation of: a. Increased regulatory attention on operational risk as: 1. Work on the core regulatory reforms wraps up; 2. Recent high profile events and heavy fines imposed on large global banks b. The issuance by the Basel Committee of the revised standardized approach for operational risk
The IIF Working Group on Operational Risk (WGOR) Four workstreams 1. Workstream 1 (WS1) tasked to look at the adequacy of existing OR capital relative to OR losses Conducted a data collection exercise 2. Workstream 2 (WS2) tasked to develop recommendations to the Basel WGOR on things to consider in revising the TSA Developed a TSA Qualitative Analysis paper 3. Workstream 3 (WS3) tasked to look develop industry views on AMA issues 4. Workstream 4 (WS4) tasked to develop industry views on OR sound practices issues Developed two papers on three lines of defense (3LOD)
The IIF Working Group on Operational Risk (WGOR) Interactions with the Basel WGOR Prior to reactivation of the IIF WGOR o o Several meetings while the existing framework was being developed The two groups met twice after finalization of the framework Most recent interactions o o There have been several meetings (2 physical meetings and one conference call) with the Basel WGOR since the reactivation of the group Planned meeting either in October or December to discuss the revised TSA proposals
Agenda 1. The IIF Working Group on Operational Risk (WGOR) a. History b. Different workstreams c. Interactions with the Basel WGOR 2. Studies produced by the IIF WGOR a. IIF WGOR data collection exercise Background of other similar studies b. The Standardized Approach (TSA) qualitative analysis paper 3. The revised TSA for operational risk what do we know?
Studies produced by the IIF WGOR IIF WGOR data collection exercise background of other similar studies Operational Risk exchange (ORX) medium to very big international banks German Savings Banks Association (DSGV) small and medium German Savings Banks Italian Database for Operational Losses (DIPO) whole Italian banking sector 3000 banking years of loss experience and capital requirements were compared; only 4 out of 3000 banking years have loss experiences that were higher than the capital requirements
Studies produced by the IIF WGOR IIF WGOR data collection exercise Note: 100% = 65
Studies produced by the IIF WGOR IIF WGOR data collection exercise Sample distribution by regulatory-approved approach
Studies produced by the IIF WGOR IIF WGOR data collection exercise Number of loss exceedences based on regulatory approved approach Capital Method BIA Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 All Exceedences Number of Banks 0 1 2 9 31 31 32 33 33 172 TSA Exceedences 1 1 Number of Banks 1 2 6 8 15 14 15 13 13 87 AMA Exceedences Number of Banks 0 0 0 4 9 14 15 17 17 76 ALL Exceedences 1 1 Number of Banks 1 3 8 21 55 59 62 63 63 335
Studies produced by the IIF WGOR IIF WGOR data collection exercise Number of exceedences based on Top 5 losses Capital Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 All Method BIA Exceedences Number of Banks 0 1 2 9 31 31 32 33 33 172 TSA Exceedences 1 1 Number of Banks 1 2 6 8 15 14 15 13 13 87 AMA Exceedences Number of Banks 0 0 0 4 9 14 15 17 17 76 ALL Exceedences 1 1 Number of Banks 1 3 8 21 55 59 62 63 63 335
Studies produced by the IIF WGOR IIF WGOR data collection exercise Number of loss exceedences based on sample of banks that provided data on all three approaches Capital Method BIA TSA AMA Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 All Exceedences Number of Banks 0 1 1 3 6 10 11 13 13 58 Exceedences Number of Banks 0 1 1 3 6 10 11 13 13 58 Exceedences Number of Banks 0 1 1 3 6 10 11 13 13 58
Studies produced by the IIF WGOR IIF WGOR data collection exercise Comparing statistics of loss/data ratio for the two sets of samples sample based on regulatory-approved approaches BIA TSA AMA 2004 2005 2006 2007 2008 2009 2010 2011 2012 Min 3.58% 1.11% 0.52% 0.08% 0.23% 0.28% 0.26% 0.16% Q1 3.58% 1.72% 0.89% 0.59% 0.95% 0.80% 0.83% 0.87% Median 3.58% 2.32% 1.13% 1.08% 1.90% 1.75% 1.59% 1.98% Mean 3.58% 2.32% 3.13% 2.14% 2.68% 2.66% 2.48% 3.17% Q3 3.58% 2.93% 2.97% 2.55% 3.24% 3.76% 3.74% 3.45% Max 3.58% 3.54% 13.91% 19.22% 9.97% 13.27% 11.10% 18.87% Min 3.35% 2.29% 1.46% 1.06% 1.19% 1.12% 0.53% 0.75% 0.78% Q1 3.35% 4.57% 4.94% 1.33% 2.92% 2.89% 2.31% 1.68% 2.74% Median 3.35% 6.85% 7.79% 5.18% 6.88% 6.08% 3.94% 5.34% 11.64% Mean 3.35% 6.85% 8.75% 7.32% 10.75% 8.26% 8.46% 32.50% 22.70% Q3 3.35% 9.13% 11.68% 10.97% 16.58% 9.07% 11.43% 26.65% 28.48% Max 3.35% 11.41% 18.51% 20.92% 32.34% 30.66% 29.60% 287.20% 80.98% Min 2.72% 3.71% 1.23% 1.37% 0.71% 1.43% Q1 3.42% 5.94% 4.35% 7.59% 4.44% 3.85% Median 5.10% 11.42% 10.02% 11.75% 7.90% 6.11% Mean 13.11% 10.28% 12.32% 16.34% 13.64% 13.48% Q3 14.80% 13.20% 18.65% 22.49% 17.74% 13.63% Max 39.53% 20.80% 34.95% 47.12% 52.72% 96.20%
Studies produced by the IIF WGOR IIF WGOR data collection exercise Comparing statistics of loss/data ratio for the two sets of samples sample based on banks providing data for all three approaches BIA TSA AMA 2004 2005 2006 2007 2008 2009 2010 2011 2012 Min 2.2% 17.2% 2.0% 2.1% 1.0% 4.4% 2.2% 1.3% Q1 2.2% 17.2% 3.3% 4.0% 3.5% 7.1% 4.4% 3.1% Median 2.2% 17.2% 4.6% 6.6% 6.6% 10.5% 6.4% 6.1% Mean 2.2% 17.2% 8.7% 7.3% 7.9% 13.5% 10.4% 12.2% Q3 2.2% 17.2% 12.0% 8.5% 11.8% 17.6% 12.0% 8.6% Max 2.2% 17.2% 19.4% 16.0% 18.5% 34.5% 32.2% 81.6% Min 2.3% 18.5% 2.2% 2.3% 1.1% 4.9% 2.4% 1.4% Q1 2.3% 18.5% 3.9% 4.7% 4.2% 7.5% 4.6% 3.4% Median 2.3% 18.5% 5.6% 7.1% 6.9% 11.2% 6.8% 7.2% Mean 2.3% 18.5% 9.6% 8.9% 9.3% 14.9% 11.2% 12.8% Q3 2.3% 18.5% 13.3% 8.9% 13.6% 19.5% 13.1% 9.4% Max 2.3% 18.5% 20.9% 23.3% 20.7% 40.9% 32.7% 81.7% Min 2.6% 22.7% 2.7% 3.1% 1.0% 6.4% 3.1% 1.4% Q1 2.6% 22.7% 4.6% 5.9% 5.1% 7.4% 6.0% 4.4% Median 2.6% 22.7% 6.6% 8.3% 9.3% 13.6% 8.0% 6.8% Mean 2.6% 22.7% 10.8% 8.4% 10.6% 18.4% 14.3% 14.1% Q3 2.6% 22.7% 14.8% 11.5% 17.0% 25.4% 15.1% 10.1% Max 2.6% 22.7% 23.0% 13.2% 21.0% 47.1% 48.7% 90.0%
Studies produced by the IIF WGOR IIF WGOR data collection exercise Differences due to institution size Median loss/capital ratio BIA TSA AMA Assets of Bank 2004 2005 2006 2007 2008 2009 2010 2011 2012 < 500 BN 2.2% 3.1% 2.4% 2.0% 2.7% 2.3% 2.1% 2.2% > 500 BN 6.1% 5.1% 8.6% 8.1% 8.0% < 500 BN 9.6% 5.6% 6.3% 7.6% 5.4% 4.7% 4.5% > 500 BN 7.8% 5.7% 9.3% 10.7% 9.3% < 500 BN 2.6% 22.7% 14.8% 9.5% 9.8% 8.0% 6.9% 5.2% > 500 BN 10.3% 15.1% 14.4% 9.4%
Retail Broker age Asset Manag ement Age ncy Serv ices Payme nts and Settle ment Comm ercial Bankin g Reta il Ban king Trad ing and Sale s Corpo rate Finan ce Studies produced by the IIF WGOR IIF WGOR data collection exercise Exceedences at the business line level 2004 2005 2006 2007 2008 2009 2010 2011 2012 ALL Betas Exceedences 2 1 1 1 5 18% Number of Banks 2 5 4 7 13 14 18 18 15 96 Exceedences 1 1 1 3 18% Number of Banks 5 7 10 12 18 23 26 26 27 154 Exceedences 2 1 3 12% Number of Banks 5 8 11 15 22 26 29 30 30 176 Exceedences 1 1 15% Number of Banks 5 7 11 15 22 26 27 27 29 169 Exceedences 1 1 18% Number of Banks 3 4 4 7 8 10 13 15 17 81 Exceedences 1 2 1 1 1 6 15% Number of Banks 3 4 7 11 14 17 15 17 13 101 Exceedences 1 1 12% Number of Banks 5 6 8 11 17 20 22 22 22 133 Exceedences 0 12% Number of Banks 2 4 8 9 15 18 20 23 23 122
Studies produced by the IIF WGOR IIF WGOR data collection exercise OR capital/total regulatory capital 2004 2005 2006 2007 2008 2009 2010 2011 2012 Min 7.92% 7.19% 6.83% 7.17% 7.53% 7.62% 7.82% 7.78% Q1 7.92% 9.73% 8.67% 11.75% 11.92% 11.72% 11.32% 11.37% BIA Median 7.92% 12.27% 12.00% 13.97% 14.97% 14.35% 14.54% 14.54% Mean 7.92% 12.27% 11.86% 14.55% 14.56% 14.66% 14.85% 14.40% Q3 7.92% 14.82% 13.96% 16.46% 16.35% 16.62% 18.10% 17.36% Max 7.92% 17.36% 18.36% 21.90% 22.48% 22.75% 24.07% 23.46% Min 10.93% 6.67% 4.45% 5.47% 3.20% 3.01% 3.44% 3.08% 3.00% Q1 10.93% 7.68% 5.52% 6.33% 5.86% 6.31% 6.49% 5.96% 6.33% TSA Median 10.93% 8.69% 5.69% 6.45% 6.84% 7.09% 7.78% 7.46% 9.03% Mean 10.93% 8.69% 6.32% 6.86% 7.00% 7.86% 8.51% 8.05% 8.46% Q3 10.93% 9.70% 6.54% 7.53% 8.04% 9.67% 10.88% 10.14% 10.19% Max 10.93% 10.71% 9.78% 8.91% 11.62% 13.69% 14.08% 13.84% 13.24% Min 5.37% 4.27% 3.15% 3.71% 3.39% 3.78% Q1 6.55% 5.64% 4.96% 5.31% 5.18% 5.94% AMA Median 7.74% 6.47% 6.43% 6.71% 6.34% 7.32% Mean 7.37% 7.28% 6.73% 7.57% 7.40% 8.23% Q3 8.38% 6.71% 7.48% 8.11% 8.47% 9.90% Max 9.02% 16.83% 16.01% 17.01% 16.55% 16.33%
Studies produced by the IIF WGOR TSA Qualitative Analysis Paper Two concerns raised: TSA is income sensitive rather than risk sensitive TSA betas have not been regularly calibrated Proposals: Use additional metrics to complement gross income Establish a framework for regularly updating the TSA
Agenda 1. The IIF Working Group on Operational Risk (WGOR) a. History b. Different workstreams c. Interactions with the Basel WGOR 2. Studies produced by the IIF WGOR a. IIF WGOR data collection exercise Background of other similar studies b. The Standardized Approach (TSA) qualitative analysis paper 3. The revised TSA for operational risk what do we know?
The revised TSA for operational risk what do we know? Why revise the TSA? Reflect recent operational risk events Update the framework based on recent data and improvements in available techniques Review the incentive structure What are being reviewed? ASA, BIA, TSA there could be just one simple approach Definition of gross income Business line mapping Incentives to move to advanced approaches What are the recent updates? Loss data collection exercise being conducted by the Basel WGOR New TSA proposals likely to be issued this month
The revised TSA for operational risk what do we know? Gross income Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 A) Balance sheet and other items Number of employees Total assets Interest-earning assets Interest-bearing liabilities B) Income statement Gross income Interest income Interest expenses Fee and commission income Fee and commission expenses Net profit (loss) on financial operations (trading book) Net profit (loss) on financial operations (non-trading book) Other operating income Other operating expenses Dividend income Administrative expenses
The revised TSA for operational risk what do we know? Business lines E) Gross income and operational risk losses by business lines Business line 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Gross Income Number of loss events EUR 10,000 Number of loss events EUR 100,000 Corporate finance Check: row 192 row 191 Pass Pass Pass Pass Pass Total amount of losses EUR 10,000 Total amount of losses EUR 100,000 Check: row 195 row 194 Pass Pass Pass Pass Pass Maximum loss (in this year) Gross Income Number of loss events EUR 10,000 Number of loss events EUR 100,000 Trading and sales Check: row 200 row 199 Pass Pass Pass Pass Pass Total amount of losses EUR 10,000 Total amount of losses EUR 100,000 Check: row 203 row 202 Pass Pass Pass Pass Pass Maximum loss (in this year)
The revised TSA for operational risk what do we know? Event types C) Operational risk losses Event type 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Whole bank Internal fraud (ET1) Number of loss events EUR 10,000 Number of loss events EUR 20,000 Number of loss events EUR 100,000 Number of loss events EUR 1,000,000 Check: row 32 row 31 row 30 row 29 Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Total amount of losses EUR 10,000 Total amount of losses EUR 20,000 Total amount of losses EUR 100,000 Total amount of losses EUR 1,000,000 Check: row 37 row 36 row 35 row 34 Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Maximum loss (in this year) Sum of the five largest losses (in this year) Up to date sum of the five largest losses Check: row 41 row 40 row 39 Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Threshold applied in loss data collection Number of loss events EUR 10,000 Number of loss events EUR 20,000 Number of loss events EUR 100,000 Number of loss events EUR 1,000,000 Check: row 47 row 46 row 45 row 44 Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Total amount of losses EUR 10,000 Total amount of losses EUR 20,000 Total amount of losses EUR 100,000 Total amount of losses EUR 1,000,000 Check: row 52 row 51 row 50 row 49 Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Maximum loss (in this year) Sum of the five largest losses (in this year) Up to date sum of the five largest losses Check: row 56 row 55 row 54 Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Threshold applied in loss data collection
The revised TSA for operational risk what do we know? Boundary losses D) Fraud losses in credit area Are first party fraud losses in credit area included in panel C? Connection with panel C Are third party fraud losses in credit area included in panel C? Number of loss events EUR 10,000 Number of loss events EUR 100,000 Number of loss events EUR 1,000,000 Total number; of which: First party frauds Third party frauds Check: sum of rows 155 and 156 row 154 Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Total number; of which: First party frauds Third party frauds Check: sum of rows 159 and 160 row 158 Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Total number; of which: First party frauds Third party frauds Check: row 162 row 158 row 154 Total amount of losses EUR 10,000 Total amount of losses EUR 100,000 Total amount of losses EUR 1,000,000 Check: sum of rows 163 and 164 row 162 Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Total amount; of which: First party frauds Third party frauds Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Check: sum of rows 168 and 169 row 167 Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Total amount; of which: First party frauds Third party frauds Check: sum of rows 172 and 173 row 171 Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Total amount; of which: First party frauds Third party frauds Check: row 175 row 171 row 167 Maximum loss (in this year) Threshold applied in loss data collection Check: sum of rows 176 and 177 row 175 Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Maximum loss (in this year); due to: First party frauds Third party frauds Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass Check: rows 181 and 182 row 180 Pass Pass Pass Pass Pass Pass Pass Pass Pass Pass First party frauds Third party frauds
Review of the Standardized Approach for Operational Risk Jermy Prenio Senior Policy Advisor September 2014