3 The framework and each instance of its application including the rationale

3 the framework and each instance of its application

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(3) The framework and each instance of its application, including the rationale for any adjustments to empirical estimates, must be documented and subject to independent review within the bank and by the supervisory authority. (4) The process and the outcomes of measurement need to be validated through comparison to actual internal loss experience, relevant external data, and appropriate adjustments made. (G) Scenario analysis A bank must use scenario analysis of expert opinion in conjunction with external data to evaluate its exposure to high severity events. When carrying reasonable assessment of plausible losses, the bank should draw on the knowledge of experienced business managers For instance, these expert assessments could be expressed as parameters of an assumed statistical loss distribution. In addition, scenario analysis should be used to assess the impact of deviations from the correlation assumptions embedded in the bank’s operational risk measurement framework, in particular, to evaluate potential losses arising from multiple simultaneous operational risk loss events. such assessments need to be validated and re-assessed on an ongoing basis through comparison to actual loss experience to ensure their reasonableness. (H) Risk mitigation 1. Under the AMA, a bank will be allowed to recognize the risk mitigating effect of insurance in the measures of operational risk used for regulatory minimum capital requirements. The recognition of insurance mitigation will be limited to 20% of the total operational risk capital charge. 2. A bank shall comply the following criteria in order to take advantage of the risk mitigation effect of insurance: (1) The insurance provider has a minimum claims paying ability rating of A; (2) The insurance policy must have an initial term of no less than one year. For policies 220
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with a residual term of less than one year, the bank must make appropriate haircuts reflecting the declining residual term of the policy. No mitigating effect will be recognized for policies with a residual term of 90 days or less; (3) The insurance policy has a minimum notice period for cancellation and non-renewal of the contract; (4) The insurance policy has no exclusions or limitations triggered by supervisory actions or, if the policy precludes any penalty or punitive damages resulting from supervisory action, the preclusion shall not keep the bank, receiver or liquidator from recovering for damages in respect of events occurring after the initiation of receivership or liquidation proceedings. (5) The risk mitigation calculations must reflect the bank’s insurance coverage in a manner that is transparent in its relationship to, and consistent with, the actual likelihood and impact of loss used in the bank’s calculation of operational risk capital.
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