Protection of Businesses Act, 1978
R 385
Banks Act, 1990 (Act No. 94 of 1990)RegulationsRegulations relating to BanksChapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof33. Operational risk: six-monthly returnDirectives and interpretations for completion of six-monthly return concerning operational risk (Form BA 400)Subregulation (8) Standardised approach and alternative standardised approach |
| (8) | Standardised approach and alternative standardised approach |
| (a) | A bank that wishes to adopt the standardised approach or alternative standardised approach for the measurement of the bank's exposure to operational risk— |
| (i) | shall obtain the prior written approval of and comply with such conditions as may be specified in writing by the Registrar, which conditions may include a period of initial monitoring by the Registrar before the bank is allowed to adopt the said approach for the calculation of its capital requirement in respect of operational risk; |
| (ii) | as a minimum, shall comply with the relevant qualifying criteria specified in paragraph (b) below; |
| (iii) | shall divide its activities into the eight business lines specified in table 1 below; |
| (iv) | shall calculate its capital requirement in accordance with the relevant provisions specified in paragraph (c) below. |
(b) Qualifying criteria
| (i) | As a minimum, a bank that wishes to adopt the standardised approach for the measurement of the bank's exposure to operational risk shall demonstrate to the satisfaction of the Registrar— |
| (A) | that the bank's board of directors and senior management are actively involved in the oversight of the bank's operational risk management framework; |
| (B) | that the bank's operational risk management system is conceptually sound and implemented with integrity; |
| (C) | that the bank has sufficient resources for the use of the standardised approach in the bank's major business lines, and in the bank's control and audit units; |
| (D) | that the bank has in place adequate policies and documented criteria to map its business lines and gross income into the business lines indicated in table 1 below, in accordance with the requirements specified in paragraph (d) below. |
| (ii) | As a minimum, in addition to the requirements specified in subparagraph (i) above, a bank with internationally active branches or subsidiaries, which bank wishes to adopt the standardised approach for the measurement of the bank's exposure to operational risk— |
| (A) | shall have in place an adequate operational risk management system with clear responsibilities being assigned to an operational risk management function, which operational risk management function, amongst other things, shall be responsible for— |
| (i) | the development of strategies to identify, assess, monitor and control or mitigate the bank's exposure to operational risk; |
| (ii) | the development of comprehensive policies and procedures relating to operational risk management and controls, including policies to address areas of non-compliance; |
| (iii) | the design and implementation of a methodology to comprehensively assess the bank's exposure to operational risk; |
| (iv) | the design and implementation of a risk reporting system in respect of operational risk; |
| (v) | the development and implementation of techniques to create appropriate incentives to improve the management and control of operational risk throughout the bank. |
| (B) | shall as part of the bank's internal operational risk assessment system track relevant operational risk data, including material losses per business line— |
| (i) | which operational risk assessment system— |
| (aa) | shall be closely integrated with the risk management processes of the bank; |
| (bb) | shall be subject to regular validation and independent review; |
| (ii) | the output of which system shall form an integral part of the process to monitor and control the bank's operational risk profile, including any risk reporting, management reporting and risk analysis; |
| (C) | shall on a regular basis report to the relevant management of the bank's business units, the senior management of the bank and the bank's board of directors its exposure to operational risk, including material losses suffered in respect of operational risk; |
| (D) | shall duly document the bank's operational risk management system; |
| (E) | shall have in place— |
| (i) | procedures to take appropriate action based on information contained in the reports submitted to the management of the bank's business units, the senior management of the bank and the bank's board of directors; |
| (ii) | a robust process to ensure compliance with the bank's documented set of internal policies, controls and procedures concerning the operational risk management system; |
| (iii) | policies that comprehensively deal with the manner in which any area or matter of non-compliance will be dealt with; |
| (F) | shall ensure that— |
| (i) | the bank's operational risk management processes and assessment systems are subject to regular independent review; and |
| (ii) | the scope of the aforesaid independent review shall include both the activities of the business units and of the relevant operational risk management function. |
[Item (F) of subregulation (8)(b)(ii) substituted by regulation 5(a) of Notice No. R. 261 dated 27 March 2015]
| (c) | Capital requirement |
| (i) | Subject to the provisions of subparagraph (ii) below, a bank shall separately calculate a capital requirement in respect of each relevant business line specified in table 1 below by multiplying the three-year average amount of gross income relating to each relevant business line with the beta factor specified in table 1 below, provided that the requirements and conditions specified in subregulation (7) relating to gross income, and in particular any relevant negative amount of gross income, to the extent that the said requirements and conditions are relevant, shall mutatis mutandis apply to each relevant business line specified in table 1 below. |
In the absence of any negative amount of gross income in any of the relevant business lines during any of the relevant three years, the relevant capital requirement for the bank may be calculated through the application of the formula specified below:
| KTSA = | [∑years 1 -3 max[∑(Gl1-8 x β1-8), 0]}/3 |
where:
| KTSA | is the aggregate required amount of capital in terms of the standardised approach |
| GI1-8 | is the annual gross income amount in a specific year, as defined in and calculated in accordance with the conditions and requirements relating to gross income specified in subregulation (7) above, in respect of each of the relevant eight business lines |
| β1-8 | is the relevant beta factor specified in table 1 below |
Table 1
|
Standardised approach |
|||
|
Business line |
Consisting of: |
Activities which may be included |
Beta factor |
|
Corporate finance |
Corporate finance |
Mergers and acquisitions, underwriting, privatisations, securitisation, research, debt (government or high yield), equity, syndications, IPO, secondary private placements |
18% |
|
Municipal/ Government finance |
|||
|
Merchant banking |
|||
|
Advisory services |
|||
|
Trading and sales |
Sales |
Fixed income, equity, foreign exchanges, commodities, credit, funding, own position securities, lending and repurchase/ resale agreements, brokerage, debt, prime brokerage |
18% |
|
Market making |
|||
|
Proprietary positions |
|||
|
Treasury |
|||
|
Retail banking |
Retail banking |
Retail lending and deposits, banking services, trust and estates |
12% |
|
Private banking |
Private lending and deposits, banking services, trust and estates, investment advice |
||
|
Card services |
Merchant/ commercial/ corporate cards, private labels and retail |
||
|
Commercial banking |
Commercial banking |
Project finance, real estate, export finance, trade finance, factoring, leasing, lending, guarantees, bills of exchange |
15% |
|
Payment and settlement |
External clients |
Payments and collections, funds transfer, clearing and settlement |
18% |
|
Agency services |
Custody |
Escrow, depository receipts, securities lending (customers) corporate actions |
15% |
|
Corporate agency |
Issuer and paying agents |
||
|
Corporate trust |
|
||
|
Asset management |
Discretionary fund management |
Pooled, segregated, retail, institutional, closed, open, private equity |
12% |
|
Non-discretionary fund management |
Pooled, segregated, retail, institutional, closed, open |
||
|
Retail brokerage |
Retail brokerage |
Execution and full service |
12% |
| (ii) | Subject to the prior written approval of and such conditions as may be specified in writing by the Registrar, which approval shall be granted only in exceptional cases, a bank may use an alternative standardised approach to calculate the bank's capital requirement relating to operational risk, in terms of which alternative standardised approach the bank— |
| (A) | may in respect of its retail banking and commercial banking business lines, instead of the gross income, multiply the loans and advances of the said business lines with the respective beta factors specified in table 1 in subparagraph (i) above and a constant factor "m" in accordance with the formula specified below: |
| (i) | In the case of the bank's retail banking business line, as follows: |
KRB = βRB X m X LARB
where:
| KRB | is the relevant capital requirement in respect of the retail banking business line |
| βRB | is the relevant beta factor for the retail banking business line, as specified in table 1, in paragraph (i) above |
| LARB | is the total outstanding amount of specified retail loans and advances, which total amount— |
| (aa) | shall not be risk weighted; |
| (bb) | shall be gross of any provision; |
| (cc) | shall be derived by calculating the relevant average amount based on the relevant total outstanding amount at the end of each year in the three year period preceding the reporting date; |
| (dd) | shall include the total drawn amount in respect of the credit portfolios specified below: |
| (i) | retail; |
| (ii) | SMEs treated as retail; |
| (iii) | purchased retail receivables |
| m | is a constant factor equal to 0.035 |
| (ii) | In the case of the bank's commercial banking business line, as follows: |
| KCB = | βCB X M X LACB |
where:
| KCB | is the relevant capital requirement in respect of the commercial banking business line |
| βCB | is the relevant beta factor for the commercial banking business line, as specified in table 1, in paragraph (i) above |
| LACB | is the total outstanding amount of specified commercial loans and advances, which total amount— |
| (aa) | shall not be risk weighted; |
| (bb) | shall be gross of any provision; |
| (cc) | shall be derived by calculating the relevant average amount based on the relevant total outstanding amount at the end of each year in the three year period preceding the reporting date; |
| (dd) | shall include the book value of securities held in the bank's banking book; |
| (ee) | shall include the total drawn amount in respect of the credit portfolios specified below: |
| (i) | corporate; |
| (ii) | sovereign; |
| (iii) | bank; |
| (iv) | specialised lending; |
| (v) | SMEs treated as corporate exposure; |
| (vi) | purchased corporate receivables; |
| m | is a constant factor equal to 0.035 |
| (B) | may aggregate the retail and commercial banking business lines and apply to the said aggregated amount a beta factor of 15 per cent instead of the percentages specified in table 1 in subparagraph (i) above; |
| (C) | may aggregate the gross income of the business lines other than the retail and commercial banking business lines and apply to the said aggregated amount a beta factor of 18 per cent instead of the percentages specified in table 1 in subparagraph (i) above; |
| (D) | shall in the calculation of average amounts comply with the relevant requirements relating to negative or zero amounts, specified in subregulation (7) above. |
| (iii) | The bank's total capital requirement in terms of the standardised approach and alternative standardised approach shall be equal to the sum of the respective capital requirements calculated in accordance with the relevant requirements specified in this paragraph (c). |
| (d) | Mapping of business lines |
A bank that adopted the standardised approach for the measurement of the bank's exposure to operational risk—
| (i) | shall have in place a board approved policy compiled by the senior management of the bank for the mapping of the bank's business lines in accordance with the relevant requirements specified in this subregulation (8); |
| (ii) | shall in a mutually exclusive and jointly exhaustive manner map all its activities into one of the eight business lines specified in table 1 in paragraph (c) above, provided that— |
| (A) | the said process to map activities into business lines for purposes of this subregulation (8) shall be consistent with the definitions of business lines applied by the bank for the calculation of the bank's required amount of capital and reserve funds in respect of other categories of risk, such as credit risk and market risk; |
| (B) | any banking or trading activity of the reporting bank which cannot readily be mapped into the business line framework specified in table 1, but which activity represents an ancillary function to an activity specified in table 1, shall be allocated to the business line that it supports; |
| (C) | when the bank maps gross income into one of the eight business lines specified in table 1 and the bank is unable to map a particular activity into a specific business line, and the activity does not represent an ancillary function to an activity specified in table 1, as envisaged in item (B), the bank shall allocate the said particular activity to the business line with the highest capital requirement; |
| (iii) | may use its internal pricing method to allocate gross income between the business lines specified in table 1, provided that the aggregate amount of gross income relating to the eight business lines specified in table 1 shall be equal to the relevant aggregate amount of gross income for the reporting bank; |
| (iv) | shall duly document its mapping process, including the relevant definitions that were applied in the mapping process, which documentation— |
| (A) | shall duly motivate any exceptions or overrides that took place during the mapping process; |
| (B) | amongst other things, shall contain business line definitions sufficiently clear to allow a third party to replicate the bank's process of business line mapping; |
| (v) | shall have in place a sufficiently robust process to define the mapping of any new activities or products; |
| (vi) | shall ensure that the bank's mapping process to business lines is subject to adequate internal controls and appropriate internal audit coverage, including independent review. |
