Minimum Capital Requirements for Operational Risk
The Reserve Bank of India has issued a Master Direction on Minimum Capital Requirements for Operational Risk, effective from the date of issuance.
The direction applies to all banks, including foreign banks operating in India, and outlines the Basel III Standardised Approach (SA) for calculating operational risk capital.
The Basel III SA consists of three components: Business Indicator (BI), Internal Loss Multiplier (ILM), and the Loss Component (LC).
The Business Indicator (BI) is calculated based on the bank’s business activities, with different marginal coefficients applied to different BI ranges (Table 1).
The Internal Loss Multiplier (ILM) is used to adjust the LC based on the bank’s internal loss data.
The operational risk capital requirement is calculated based on the BI and ILM, with different approaches applied to banks in different buckets (buckets 1, 2, and 3) based on their operational risk annual loss data.
Banks in bucket 1 and those in buckets 2 and 3 without 5 years of high-quality operational risk annual loss data will follow one approach, while banks in buckets 2 and 3 with 5 years and above of high-quality data will follow another approach.
The direction provides detailed guidelines for calculating the operational risk capital requirement, including the computation of the Loss Component (LC) and the Internal Loss Multiplier (ILM).
Note: The direction is effective from the date of issuance and applies to all banks operating in India.
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Download: Master Direction on Minimum Capital Requirements for Operational Risk