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Basel III final rule summary

Understanding the new operational risk capital standard

The Basel III final rule fundamentally changes how operational risk capital (ORC) is calculated. This new standard has major implications for banks’ internal loss data and how it can be used to enhance business value. Deloitte’s banking specialists can help you build advanced capabilities that take your operational risk management framework beyond compliance.

A new approach for calculating operational risk capital

Under Basel III regulations, banks must calculate operational risk capital (ORC) using the standardized measurement approach. This will limit a bank’s influence over ORC to a single variable: the internal loss multiplier (ILM).

Now, banks will need to ensure their internal loss data are as accurate and robust as possible to substantiate their calculated ILM. And operational risk managers will have the opportunity to reduce the existing and future ORC by focusing efforts on managing and reducing actual operational losses.

Taking control of internal losses

To mitigate the impact of the internal loss factor in determining operational risk capital calculations, banks can focus on:

  • Improving the quality of historical loss data. Formalizing definitions of operational risk events and improving incident identification and reporting can give operational risk managers the insights needed to reduce losses moving forward.
  • Changing behaviors and culture. Many banks have traditionally viewed internal operational risk incidents—and the corresponding losses— as unavoidable costs of doing business and something over which they have had little control.

When working on Basel III compliance, banks have the incentive to change behavior by aligning operational losses with business unit and executive performance. Managers need to be empowered with enough authority to change their business environment—including the underlying process and tools—and to manage risks more proactively.

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What is the future of operational risk management?

Enhancing the value of operational risk management programs under the Basel III final rule begins with embracing new technologies and techniques.

A bank’s infrastructure for operational risk management should leverage automated workflows to continuously monitor for emerging problems and ensure the right people receive the right information in a timely manner, enabling them to respond quickly and effectively.

Banks can also explore the latest advances in robotic process automation (RPA) and cognitive technology to streamline and automate routine activities, such as data collection, cleansing, and storage. Armed with aggregated data about internal losses, banks will be better positioned to capitalize on advanced capabilities, such as big data analytics, correlation and root cause analysis, and predictive risk intelligence.

Deloitte’s operational risk management solutions can help banks take advantage of these technologies to identify patterns and trends that may help reduce internal losses in the future. These advanced capabilities can give a bank the forward-looking insights it needs to develop effective strategies for mitigating risk and reducing losses, including reducing the bank’s ILM and required ORC.

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Meet the authors

Monica O'Reilly
Banking and Capital Markets Advisory Leader
Principal | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP
+1 415 783 5780
Nitish ldnani
Operational Risk Banking Leader
Principal | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP
+1 212 436 2894
Krissy Davis
Operational Risk Leader
Partner I Deloitte Risk and Financial AdviSory
Deloitte & Touche LLP
+1 617 437 2648
Steve Bhatti
Specialist Leader I Deloitte Risk and Financial Advisory
Deloitte & Touche LLP
+1 617 437 2451
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