1. Introduction

1. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk [Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements.], but excludes strategic and reputational risk.

2. The standardised approach for measuring minimum operational risk capital requirements replaces all existing approaches in the Basel II framework. That is, this standard replaces paragraphs 644 to 683 of the Basel II framework.

3. Consistent with Part I (Scope of Application) of the Basel II Framework, the standardised approach applies to internationally active banks on a consolidated basis. Supervisors retain the discretion to apply the standardised approach framework to non-internationally active banks.

2. The standardised approach

4. The standardised approach methodology is based on the following components: (i) the Business Indicator (BI) which is a financial-statement-based proxy for operational risk; (ii) the Business Indicator Component (BIC), which is calculated by multiplying the BI by a set of regulatory determined marginal coefficients (αi); and (iii) the Internal Loss Multiplier (ILM), which is a scaling factor that is based on a bank's average historical losses and the BIC.