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July 06, 2018

EC published the Commission Delegated Regulation (EU) 2018/959 on regulatory technical standards of the specification of the assessment methodology under which competent authorities permit institutions to use Advanced Measurement Approaches (AMA) for operational risk. This Regulation supplements the Capital Requirements Regulation (EU Regulation No 575/2013) and it shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

For the purposes of own funds requirements for operational risk, the first subparagraph of Article 312(2) of CRR provides that competent authorities permit institutions to use AMA based on the institutions' own operational risk measurement systems where they meet all of the qualitative and quantitative standards set out in that Article, implying compliance of institutions with these requirements at all times. As a result, such an assessment not only relates to the initial application of an institution for the permission to use the AMA, but also applies on an ongoing basis.

The assessment by competent authorities of an institution's compliance with the requirements referred to in points (a) and (b) of Article 312(4) of CRR to use AMA should not be conducted in a uniform manner. The nature of the elements to be assessed varies according to the type of assessment conducted, which in turn depends on the type of application submitted. Competent authorities are required to assess such compliance where an institution first applies to use AMA, where an institution applies to extend the AMA in accordance with the approved sequential implementation plan, where an institution applies to extend or change the AMA it has been granted permission to use, and where an institution applies to return to the use of less sophisticated approaches in accordance with Article 313 of CRR. In addition, competent authorities should conduct an ongoing review of the use of the AMA by institutions.

The standards stipulate that it is also necessary to harmonize supervisory approaches regarding the correct articulation of operational risk in financial transactions, including those related to market risk, as the operational risks of these transactions are proved to be sizable and their drivers, typically of multifaceted nature, may be not consistently detectable and recordable as such throughout EU. This Regulation is based on the draft regulatory technical standards submitted by EBA to EC. EBA has conducted open public consultations on these draft regulatory technical standards and analyzed the potential related costs and benefits. With regard to the assessment of the AMA (referred to in Article 1) of an institution which, on the date of entry into force of this Regulation, is already using an AMA for the purpose of calculating its own funds requirements for operational risk, or of an institution which has already applied for a permission to use an AMA for that purpose, both of the following shall apply:

  • This Regulation shall apply from one year after its entry into force
  • Article 34(g) shall apply from two years after its entry into force.

 

Related Link: EU Regulation 2018/959

Comment Due Date: OJ + 20 Days

Keywords: Europe, EU, Banking, Operational Risk, Regulation 2018/959, Advanced Approaches, CRR, EC

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