Group allocation paper’s legal entity calculation angers industry

Basel, Switzerland -- The Basel Committee on Banking Supervision published its much–anticipated paper, Principles for the home-host recognition of AMA operational risk capital in late January. However, the solution outlined in the paper to the group allocation problem has angered the financial services industry, which had lobbied hard to be permitted to allocate op risk on a top-down approach, rather than calculating the capital charge at the legal entity level. The paper also leaves certain important questions unanswered ahead of the proposed finalisation of the Basel II document in June.

The group allocation problem arises under the advanced measurement approach (AMA), by which firms have to calculate their operational risk regulatory capital using mathematical models, which in turn use data gathered on operational losses. Respondents to the Basel Committee’s third consultative paper (CP3) had three general objections to the allocation of op risk by individual subsidiary units. First, modelling for each unit would be difficult due to the lack of data within some (especially