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Home ›  Best Practices

Australian Prudential Standard APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk – Overview and Summary of Requirements

  • By: Staff Editor
  • Date: November 25, 2011

Instituted in November 2007 under the Banking Act, the Australian Prudential Standard, APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk, gives the requirements that authorized deposit taking institutions must meet both at the time of initial implementation and on an ongoing basis for regulatory capital purposes.

 
Applicability
 
This Prudential Standard applies to authorized deposit taking institutions (ADI) that are seeking or have been given approval to use an advanced measurement approach (AMA) to operational risk for the purpose of determining regulatory capital. 
 
What is an AMA?
 
An AMA is an advanced approach used to measure an ADI’s regulatory capital for operational risk that has been approved by the Australian Prudential Regulation Authority (APRA).
 
What is operational risk?
 
According to the Prudential Standard, operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, from external events. Operational risk includes legal risk but not strategic and reputational risks.
 
The operational risk management framework is the organizational structures, processes and systems used in identifying, assessing, measuring, monitoring, controlling and mitigating operational risk.
 
Key Principles for Complying with this Standard
 
ADIs that receive approval from the APRA to use an AMA must:
  • Have in place a robust operational risk management framework and a conceptually sound operational risk measurement system
  • Hold regulatory capital proportionate with its exposure to operational risk.
 
Adopting the Advanced Management Approach
 
The APRA generally requires approved ADIs to apply the Advanced Management Approach or AMA across all business activities.
 
An ADI can use a combination of the AMA and the standardized approach to operational risk for measuring its ORRC (an approach referred to as partial use) in cases where an ADI:
 
  • Moves from the standardized approach to operational risk
  • Undertakes a new business activity
  • Has acquired a new business through a merger or acquisition
  • Has certain immaterial business activities
 
Summary & Overview of Requirements
 
Operational Risk Management Framework
  • Should be sufficiently robust to facilitate quantitative estimates of the ADI’s ORCC that are sound, relevant and verifiable
  • Should be suitably rigorous and consistent with the complexity of the ADI’s business
  • While applying for approval, an ADI must demonstrate processes it has undertaken to establish an operational risk management framework
Operational Risk Measurement System
An ADI’s operational risk measurement framework must be:
  • Conceptually sound
  • Comprehensive
  • Consistently implemented
  • Transparent
  • Capable of independent review and validation
  • Sufficiently comprehensive to capture all material sources of operational risk across the ADI
ORRC (Operational Risk Regulatory Capital)
  • Must meet a soundness standard comparable to a one-year holding period and a 99.9 percent confidence level
  • Must cover Expected Losses (EL) and Unexpected Losses (UL)
Board of Directors and Senior Management
 
  • Responsible for Operational risk profile of ADI
  • Responsible for Operational risk management framework
  • Must periodically evaluate and review the framework
  • Must review operational risk management reports
  • Develop appropriate policies relating to the operational risk management framework
  • Must establish an independent risk management function that is functionally independent and designs and maintains the framework, ensuring compliance
 
Documentation
The operational risk management framework should be documented comprehensively and in detail
Internal reporting
The ADI must implement a process of regular, internal monitoring of its operational risk profile
Independent review
The operation risk management framework must be reviewed independently during:
  • The AMA approval process
  • After approval is gained, on an ongoing basis to ensure integrity of the framework
 
Additional Resources
 
Read the Australian Prudential Standard, APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk in full
 

 

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