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Implementation of The Standardised Approach (TSA) for Calculation of Capital Charge for Operational Risk

DBOD. No. BP.BC. 84 /21.06.001/2009-10

 March 31, 2010

The Chairman and Managing Directors/
Chief Executive Officers of
All Commercial Banks

Dear Sir

Implementation of The Standardised Approach (TSA) for
Calculation of Capital Charge for Operational Risk

Please refer to our circular DBOD BP. BC. 23/21.06.001/2009-10 dated July 7, 2009, inter alia advising banks that they can apply for migrating to The Standardised Approach and Alternative Standardised Approach (ASA) for Operational Risk from April 1, 2010 onwards.

2. The Basel II Framework  presents three methods for calculating operational risk capital charges in a continuum of increasing sophistication and risk sensitivity: (i) the Basic Indicator Approach (BIA); (ii) the Standardised Approach (TSA); and (iii) Advanced Measurement Approaches (AMA). A bank following BIA can switch over to the AMA directly. However, as banks are aware, all the qualitative requirements relating to operational risk management applicable to TSA form part of the qualitative requirements for AMA. Therefore, if a bank does not have plans to switchover to AMA before 2014, it may first consider moving to TSA so that the work done by it in implementation of TSA could be used to meet part of the requirements for AMA as and when the bank considers switching over to that approach. Also, the banks which already have three year data of gross income of different business lines may also first consider implementing TSA.

3. The guidelines on TSA/ASA, largely based on BCBS document, ‘International Convergence of Capital Measurement and Capital Standards; June 2006 (Basel II), are furnished in the Annex.

4. The basic methodology of calculation of capital charge for operational risk remains the same as in case of Basic Indicator Approach (BIA) in as much as the exposure indicator for operational risk continues to be Gross Income. However, in TSA there is a requirement of mapping the activities of a bank into eight business lines as indicated in Appendix 1 of the guidelines. In addition, banks also have to meet minimum standards for management of operational risk including capturing of operational loss data for individual business lines as indicated in the guidelines.

5. The banks interested in migrating to TSA/ASA for operational risk capital may approach RBI (DBOD) with a formal application after March 31, 2010, with a write up in support of their compliance with the provisions of the guidelines furnished in the Annex. It may be reiterated that banks would have the discretion to adopt TSA/ASA, while continuing with simpler approaches for computation of capital for credit and market risks.

Yours faithfully

(B. Mahapatra)
Chief General Manager