Research and Studies

Home > Research and Studies > Bank of Japan Working Paper Series, Review Series, and Research Laboratory Series > Bank of Japan Working Paper Series 2000 > Internal Risk Based Approach-- Evolutionary Approaches to Regulatory Capital Charge for Operational Risk--

Internal Risk Based Approach

-- Evolutionary Approaches to Regulatory Capital Charge for Operational Risk--

August 9, 2000
Toshihiko Mori
Eiji Harada

Papers in the Financial and Payment System Office Working Paper Series are circulated in order to stimulate discussion and comments. Views expressed are those of authors and do not necessarily reflect those of Bank of Japan or the Financial and Payment System Office.

If you have any comment or question on the working paper series, please contact each author whose e-mail address is shown in the columns next to each title.

Click on fwp00e02.pdf (197KB) to download the full text.

Introduction

Since the Basel Committee proposed an explicit capital charge in its consultation paper issued in June 1999, various approaches to measuring operational risk have been developed by both the industry and supervisors. Among them was the Internal Risk Based (IRB) approach, in which individual banks' internal loss data would be effectively taken into account while the structure of the scheme would be kept relatively simple and comparable compared to the structure of "full model" type approaches. IRB approach can bridge the gap between a basic approach and a more advanced approach, providing a clear and evolutionary path that leads banks to more sophisticated approaches on a business line by business line basis.

The purpose of this paper is to explain the structure of the IRB approach and its application to regulatory capital calculation. Of course, the authors of the paper fully recognize that the IRB approach is still under development. Until now, the Bank of Japan has conducted research on operational risk measurement along with a series of dialogues with the industry1. In writing this paper, the authors tried to incorporate the industry's view toward regulatory capital for operational risk, while emphasizing simplicity, comparability,

  1. Some of the outcomes of the research have been posted on the website of Bank of Japan. Please see "Measuring Operational Risk in Japanese Major Banks" on the website. It is fully appreciated that the authors of the paper have received a lot of comments and questions from the industry and others on a global basis that result in the content of this paper.