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EBF Response to CEBS Consultation on Operational Risk Guidelines

Core Content

The European Banking Federation (EBF) has responded to the Committee of European Banking Supervisors (CEBS) consultation on its Compendium of Supplementary Guidelines on Implementation Issues of Operational Risk. The EBF supports CEBS' initiative to clarify and provide more guidance on operational risk implementation, aiming to increase supervisory convergence and consistency across banks. However, they also highlight areas where further clarification is needed to ensure alignment with industry practices and regulatory flexibility.

Main Views

1. Scope and Definitions of Operational Risk

• The EBF appreciates the effort to clarify the scope of operational risk and strategic risk.
• They emphasize the importance of maintaining flexibility under the Capital Requirements Directive (CRD) to allow for future developments.
• Pipeline events should be addressed with clear guidance, and the IFRS framework may serve as a useful benchmark.
• The distinction between operational risk and credit/reputational risk needs clarification, especially regarding how to treat reputational risk within the operational risk framework.
• The definition of "operational risk loss" should be more precise, particularly for pending losses, near miss events, and opportunity costs.

2. Operational Risk Versus Strategic Risk

• Strategic risk should be clearly separated from operational risk.
• The EBF suggests splitting strategic risk into two subcategories:
  • Business/commercial risk: related to profit fluctuations not tied to other risk factors.
  • "Pure" strategic risk: linked to major strategic decisions or shifts.
• Clarification is needed to ensure that events classified under strategic risk are not included in operational risk loss databases.

3. Operational Risk Data Collection and Reporting

• The EBF recommends including industry best practices such as the ORX and DIPO databases as references for consistent operational risk definitions and terminology.
• The loss database should only include losses that have actually occurred, not pending or hypothetical losses.
• Timing impacts (temporary or permanent distortions) should be excluded from the Capital Adequacy Ratio (CaR) calculation as they do not represent proper operational risk losses.

4. Use Test for AMA Firms

• The use test is a key focus for operational risk management, and the EBF supports CEBS' guidelines.
• They suggest that simpler approaches may be suitable for smaller credit institutions in local markets, possibly based on key risk area identification rather than detailed process monitoring.
• The term "operational risk exposure" should be either defined or removed, as it is not commonly used in the industry.
• The marginal business measure for operational risk is not applicable, and the EBF highlights the need for realistic expectations regarding senior management involvement in operational risk processes.

5. Capital Allocation for AMA Firms

• Home and host supervisors should adopt a practical and group-wide approach to capital allocation to reflect diversification benefits.
• Footnotes should be added to explain methodologies like Expected Shortfall and the Shapley method.
• The approval process for new allocation mechanisms should be clarified, especially the joint decision-making process between home and host supervisors.
• Regular dialogues under Pillar 2 are recommended to ensure transparency and avoid unnecessary capital requirements.

Key Information

• Pipeline events require clearer guidance on how they should be treated within the operational risk framework.
• Pending losses and near miss events should not be included in the operational risk loss database unless they result in actual losses.
• Reputational risk should not be automatically excluded from operational risk but may require specific guidance on its treatment.
• The ORX and DIPO databases are suggested as references for consistent definitions and terminology.
• The use test and capital allocation for AMA firms are critical areas for further development and clarification.
• Senior management involvement in operational risk should be realistic and not overly burdensome.
• Industry best practices should be considered in shaping supervisory guidelines to ensure practicality and consistency.

Conclusion

The EBF encourages CEBS to refine its guidelines by incorporating industry feedback, providing more concrete examples, and ensuring alignment with existing accounting and risk management frameworks. They also stress the importance of maintaining flexibility and proportionality in the application of operational risk principles.