On October 6, 2014, the Basel Committee on Banking Supervision (the “Basel Committee”) published a review on the implementation of its principles for the sound management of operational risk, as well as a consultation paper dealing  with revisions to the simpler approaches related to operational risk. The Basel Committee review found that banks have not made sufficient progress at implementing the Basel Committee principles and that they should, amongst other things, improve the implementation of these principles, as well as board and  senior management oversight.

The Basel Committee is concerned that the operational risk capital requirements   of a wide spectrum of banks is not correctly estimated and that weaknesses in the existing set of simple approaches to operational risk stem mainly from the use of gross income (“GI”) as a proxy indicator for operational risk exposure based on an often incorrect assumption that the operational risk exposure of banks increases linearly in proportion to revenue. The Basel Committee seeks feedback on proposals to: (i) replace GI with the business indicator (“BI”) for determining operational risk capital; (ii) remove differentiation by business-line as this is not found to be a significant risk-driver; and (iii) integrate size into the new methodology, as this is deemed to be a significant risk-driver. The consultation closes on January 6, 2015.

The review on sound management of operational risk is available at:

http://www.bis.org/publ/bcbs292.pdf

and the consultation paper is available at

http://www.bis.org/publ/bcbs291.pdf.