Basel III International Banking Framework OPE25: Calculate operational risk capital with the standardised approach (BI, BIC and ILM)

The bank must apply the operational risk definition covering losses from failed processes, people, systems or external events, including legal risk and excluding strategic and reputational risk (OPE10.1), and build the Business Indicator from the interest, leases and dividend, services and financial components defined in OPE10, each averaged over three years with net items taken in absolute value year by year first (OPE25.3-25.6). The BIC applies marginal coefficients of 12% up to 1 billion euro, 15% between 1 and 30 billion euro and 18% above 30 billion euro (OPE25.7). Capital equals BIC multiplied by the ILM, and RWA equal 12.5 times capital (OPE25.2). The Loss Component is 15 times average annual net losses over the previous 10 years (OPE25.8), based on 10 years of high-quality data, or at least five years on transition, with BIC-only capital where fewer than five exist (OPE25.10). For bucket 1 banks the ILM is 1 unless the supervisor allows loss data; a jurisdiction may set ILM at 1 for all banks (OPE25.11). Banks with BI above 1 billion euro must use loss data directly (OPE25.12). Banks failing the loss data standards must hold at least 100% of BIC and disclose this (OPE25.13). Acquired and merged businesses must be included for ten years of losses and three years of BI (OPE25.34).