On 7 June 2017, the European Banking Authority (EBA) published its 2018 EU-wide stress test draft methodology and templates for discussion with the industry. The methodology covers all relevant risk areas and, for the first time, will incorporate IFRS 9 accounting standards. The results will inform the 2018 Supervisory Review and Evaluation Process (SREP), challenging banks’ capital plans and leading to relevant supervisory outcomes. EBAˋs document contains operational risks, based on the definitions of Basel II. Data on behavioral risks (ICT), which will be treated as operational risks under SREP, are also queried. The data collected here will be used to review the OpRisk strategies and their identification, assessment, monitoring and documentation of risks as well as the business continuity process for the SREP approach.
Always in Control – Prevention in the focus of OpRisk
Since OpRisks are caused by the daily business, but damages of many OpRisks categories, such as internal fraud, cause serious damage but rarely occur, the documentation and early detection of potential dangers by internal controls is enormously important. The CCR defines OpRisk as a “risk of losses caused by the inadequacy or failure of internal procedures, people and systems, or external events, including legal risks.” The Bank’s business processes are therefore a starting point for defining an early warning system for OpRisks. For a functioning early warning system, the risks must be evaluable at all times. To achieve this, structured documentation is inevitable. The company TOPP Tactical has dealt extensively with this topic and developed a process management tool (P.R.E.S.T.O.), which dynamically analyzes processes and makes use of defined key figures, e.g. Key Performance Indicators (KPI) identified and documented risks.
Measurement Approaches – AMA vs. SMA
Credit institutions generally have three options for calculating capital requirements according to CCR: the basic indicator approach (BIA); The standard approach (TSA), an advanced measurement approach (AMA). The BIA and TSA are highly simplified models, which are rarely applied on their own. Since there are a large number of internal modeling practices for OpRisks among credit institutions and the AMA is complex in its application, AMA is strongly criticized by banks. The BCBS proposes a new approach to solve the problems of risk-weighted capital ratios – the standardized measurement approach (SMA).