What changed
RBI has opened the window for banks to apply for migrating to the Standardised Approach (TSA) or Alternative Standardised Approach (ASA) for operational risk capital from April 1, 2010. This follows an earlier circular advising banks of this option. The guidelines are based on Basel II and require banks to map activities into eight business lines and meet minimum operational risk management standards.
What it means for you
Banks can now move beyond the Basic Indicator Approach (BIA) to a more risk-sensitive method for operational risk capital. TSA uses gross income as the exposure indicator but requires business line segmentation and loss data capture. This move also helps banks prepare for Advanced Measurement Approaches (AMA) if they plan to switch after 2014.
What you must do
- Assess your bank's readiness to map activities into the eight prescribed business lines as per Appendix 1 of the guidelines.
- Ensure your bank meets the qualitative requirements for operational risk management, including capturing operational loss data for each business line.
- Prepare a detailed write-up demonstrating compliance with the TSA/ASA guidelines for submission to RBI (DBOD).
- Submit a formal application to RBI after March 31, 2010. Banks with at least three years of gross income data for different business lines may particularly consider implementing TSA.
Who it affects
All commercial banks currently using Basic Indicator Approach (BIA) for operational risk, Banks planning to adopt more sophisticated operational risk capital methods, Banks with three years of gross income data across business lines
What is the key difference between BIA and TSA for operational risk?
Both use gross income as the exposure indicator, but TSA requires banks to map activities into eight business lines and meet additional qualitative standards, including capturing operational loss data for each line.
Can a bank directly switch from BIA to AMA without adopting TSA?
Yes, a bank can switch directly from BIA to AMA. However, the qualitative requirements for TSA are part of AMA requirements, so adopting TSA first can help meet part of AMA conditions if the bank plans to switch after 2014.
When can banks start applying for TSA/ASA migration?
Banks can submit formal applications to RBI (DBOD) after March 31, 2010, along with a write-up demonstrating compliance with the guidelines.