CMF proposed a standardized methodology for the determination of operational risk-weighted assets (APRO) of banking entities operating in Chile, in accordance with the latest international standard (Basel III) and the recent modification of the General Banking Law. CMF also published a report that evaluates the impact of this proposal, the frequently asked questions on this proposal, and a presentation that summarizes the key elements of the consultation on the methodology for determining risk-weighted assets. The consultation ends on October 25, 2019.
The proposed regulatory standard computes the assets weighted by operational risk from two components. The first component is a business indicator and the second component is an adjustment factor based on the operational losses made in the last 10 years. Prior to the last modification of the General Banking Law, the computation of risk-weighted assets for the determination of the capital requirements of a bank, contained in Article 66, considered only credit risk. The consideration of operational risk in determining the risk-weighted assets of banking companies will contribute to better coverage of the risks that these institutions face as well as to adequate internal capital management.
The current General Banking Law mandates CMF to establish standardized methodologies for determining the risk-weighted assets of banks, by means of a general rule, with the prior favorable agreement of the Council of the Central Bank of Chile. As per the current practice, CMF may also authorize banks to use their own methodologies to determine risk-weighted assets. However, the Basel III standard of BCBS proposes a single standard method and does not support the use of proprietary methodologies for the calculation of assets weighted by operational risk, which is why such methodologies have not been included in the proposed regulatory framework. BCBS defines operational risk as the risk of suffering losses due to inadequacy or failures in internal processes, personnel, and internal systems or due to external events. Operational risks include internal and external fraud, cyber-security gaps, problems in the employment relationship, system failures, damage to material assets, and bad business practices.
Related Links (in Spanish)
Comment Due Date: October 25, 2019
Keywords: Americas, Chile, Banking, Basel III, Operational Risk, Risk-weighted Assets, General Banking Law, FAQ, Standardized Approach, CMF
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