Capital impact of the SMA

  • 27 May 2016

The proposal

On 4 March 2016 the Basel Committee on Banking Supervision (BCBS) proposed a new Standardised Measurement Approach (SMA) for Pillar I operational risk capital. It proposed the SMA replaces all existing Basic, Standardised and Advanced approaches for calculating operational risk capital requirements.​

The BCBS’ stated aim is to achieve an appropriate balance between simplicity, comparability, and risk sensitivity for operational risk capital calculations. It expects the revisions to have a relatively neutral impact on capital.

Responding to the proposal

We replied to the Committee’s proposal, commenting on the SMA’s capital impact, proposed methodological changes, and demonstrated areas of implementation needing attention.

We limited our comments toward improving the functioning of the proposed SMA, and made the following key observations:

  • Calibration: We are concerned that the proposal results in a substantial additional capital impact and recommend that the calibration is reviewed now and on an ongoing basis
  • Methodology: We are concerned that the SMA may be volatile and inconsistent in application and make some proposals to address these issues
  • Structure: We highlight the concern of some Members who feel the SMA does not adequately capture differences in business models, and due to super additivity may inadvertently offer a capital incentive to different business models
  • Implementation: We highlight a number of key issues that would, if not addressed, undermine the implementation of the new regime

You can download our full letter to the BCBS below.

Capital impact of the SMA

To assess the impact of Basel’s proposals we carried out a benchmark of the SMA. In March 2016, 54 of our Members submitted their estimated SMA capital requirements.

The results

Within the sample of banks surveyed we found:

  • The SMA is not capital neutral in comparison to current regulatory approved capital
  • 75% of banks would see an increase in capital, equating to an additional €115 BN Pillar I capital
  • European banks see the biggest increase under the SMA, experiencing on average a 63% higher capital charge in comparison with current regulatory approved capital
  • In relation to gross revenue, US banks would continue to hold higher capital than other regions, at around 32% of gross revenue compared to 20% for their European counterparts
  • Larger banks would hold proportionally more SMA capital, face the biggest increase beyond current regulatory approved capital, and experience the largest impact from the loss history
  • For the smallest banks the implied SMA capital requirement can be below the current standardised approach

You can read the full report – Capital impact of the SMA – by downloading it below.

Read more

ORX response to the BCBS on the SMA

ORX Capital impact of the SMA

ORX SMA benchmark participants list - March 2016