Module 3 Operational Risk Guidance

Summary

This is Guernsey Financial Services Commission guidance explaining how banking subsidiaries licensed in the Bailiwick of Guernsey should complete the Operational Risk module (Module 3) of the BSL/2 prudential return. It sets out the three Basel II based approaches used to calculate the operational risk capital charge and RWA equivalent, and how to complete the corresponding reporting forms.

• Scope: Applies only to Guernsey licensed banks operating as subsidiaries; licensed branches are not required to complete this module.
• Basic Indicator Approach (BIA, Form 1.1): Capital charge equals 15% (Alpha) of average gross income over the past three years, ignoring years with non positive income; RWA equivalent is the charge multiplied by 12.5.
• Standardised Approach (TSA, Form 1.2): Income must be allocated across eight defined business lines, each multiplied by its Beta factor (12% to 18%), summed per year, then averaged over positive years and multiplied by 12.5 for the RWA equivalent.
• Alternative Standardised Approach (ASA, Form 1.3): Uses average retail and commercial lending volumes multiplied by a fixed factor of 3.5% and a 15% Beta, plus 18% of all other income; a bank must have agreed use of ASA with the Commission and meet qualifying criteria including a documented operational risk management system, regular reporting, and independent review, with additional criteria for internationally active banks.
• Year of operation rules: Partial years of six months or more are treated as full years with income annualised; partial years under six months are disregarded.
• Form completion mechanics: Only the form matching the approach agreed with the Commission is marked YES and completed; the other two forms are marked NO and left blank.

The guidance is explanatory and procedural, clarifying calculation methodology and form completion rather than creating new standalone legal duties beyond the existing BSL/2 reporting requirement.

Key obligations

• Guernsey licensed banking subsidiaries must complete the Operational Risk module of BSL/2 using the approach (BIA, TSA or ASA) agreed with the Commission, marking that form YES and leaving the other two forms blank.
• Banks must allocate all income to the appropriate business lines in accordance with the mapping principles in the annexes when using TSA or ASA.
• Banks using or seeking to use the ASA must develop and document specific policies and criteria for mapping retail and commercial lending business lines separately from other aggregated business lines, and review and adjust these for new or changing business activities.
• Internationally active banks using the ASA must maintain an operational risk management system with clearly assigned responsibilities, systematically track operational risk data including material losses by business line, provide regular reporting of operational risk exposures to business unit, senior management and the board, maintain well documented policies and procedures including for non-compliance, and subject the system to regular independent review and external audit or supervisory review.
• Banks must treat partial years of operation of six months or more as full years (annualising gross income) and disregard partial years of less than six months when calculating capital charges.

Applies to

Guernsey licensed banking subsidiaries