Consultation Paper - Operational Risk (2022)

Summary

This is a Bermuda Monetary Authority consultation paper proposing to adopt the Basel III revised standardised approach (RSA) for calculating banks' operational risk capital requirements, replacing the current Basel II Standardised Approach and Basic Indicator Approach. The paper explains the new methodology (Business Indicator, Business Indicator Component and Internal Loss Multiplier) and several proposed Bermuda-specific national discretions, and invites industry comment before the rules are finalised.

• Scope: Applies to all Bermuda banks and their solo/subsidiary entities calculating operational risk capital charges; the current AMA option remains excluded.
• New methodology: Operational risk capital would be the product of the Business Indicator Component (BIC) and the Internal Loss Multiplier (ILM), replacing gross-income-based Basel II approaches.
• National discretion on BI buckets: Proposed Bermuda-dollar BI ranges (Bucket 1 up to BM$100m at 12 percent, Bucket 2 up to BM$250m at 15 percent, Bucket 3 above BM$250m at 18 percent) instead of the Basel euro-denominated bands.
• Loss data build-up: Banks may initially use 5 years of high-quality loss data, building up to a full 10-year data set between 2023 and 2028.
• Materiality threshold: Proposed loss-event inclusion threshold of BM$10,000, continuing the Authority's existing operational risk guidance rather than the Basel EUR20,000 threshold.
• Implementation timing: Basel's global implementation date has moved to 1 January 2023 (from 1 January 2022 due to Covid-19), and the finalised requirements will be incorporated into the Authority's Basel III for Bermuda Banks Final Rule.
• Related consultation: A separate consultation will address adoption of the March 2021 Principles for the Sound Management of Operational Risk.

As a consultation paper, the document does not itself impose binding capital or reporting requirements; it sets out proposals on which the Authority sought industry feedback, with the resulting rules to be finalised and issued separately.

Key obligations

• Industry and other stakeholders must submit comments on the proposals to banking@bma.bm by close of business on 31 March 2022.
• Once finalised, banks in Bucket 2 or higher will be required to use their internal operational loss experience (loss component) in the standardised approach calculation.
• Once finalised, banks must maintain documented, validated procedures for identification, collection and treatment of internal operational risk loss data and map historical losses to the Authority's supervisory loss event categories.
• Once finalised, banks must recalculate their operational risk charge based on audited year-end results, with changes reflected in the following quarter.
• A bank wishing to exclude divested activities from its BI calculation, exclude specific loss events, or include loss data while in Bucket 1 must obtain prior approval from the Authority and disclose such exclusions under Pillar 3.

Applies to

banks, solo or subsidiary banks, bank holding company subsidiaries

Deadlines

• 31 March 2022: Deadline for industry and stakeholders to submit comments on the consultation proposals to banking@bma.bm.
• 1 January 2023: Basel's revised (postponed) global implementation date for the operational risk standardised approach, which the Authority proposes to adopt.
• 2023 to 2028: Proposed transition period during which banks may use a 5-year loss data set, building up to the full 10-year high-quality loss data set.