Operational Risk framework and Standardised Measurement Approach (SMA)

Abstract

On December 2017, the Basel Committee published the “Basel III: Finalising post-crisis reforms” (also known as Basel IV) that introduces the Standardised Measurement Approach (SMA) to define the Pillar I operational risk capital requirement that is foreseen to entry into force on the 1st of January 2025, replacing all the existing approaches. This approach not only introduces a new method to be used to calculate the operational risk capital requirement but details several updates that have to be applied to the main components of the framework such as Governance, Loss Data Collection and Risk Self-Assessment. With the entry into force of the SMA, banks have the chance to fully re-think their operational risk Management Framework (ORMF) integrating the different components and making it more efficient and effective in terms of data governance, process management and reporting. This paper describes the SMA methodology to be implemented to calculate the Pillar I operational risk capital requirement and provides an overview of the expected impact on the different components of the ORMF of the banks

Keywords

• operational risk
• risk management
• risk management framework
• regulatory capital requirement
• standardised measurement approach
• sma
• basel iii reform
• business indicator component
• internal loss multiplier
• loss data collection
• risk and control self-assessment
• operational risk management framework
• capital requirement regulation