2 Detailed criteria The following quantitative standards are applicable to

2 detailed criteria the following quantitative

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2. Detailed criteria The following quantitative standards are applicable to calculating the regulatory minimum capital charge for operational risk: (1) Any internal operational risk measurement system must be consistent with the definition of operational risks and the definition of loss event types (see Annex 3). (2) A bank shall calculate its regulatory capital requirement as the sum of expected loss (EL) and unexpected loss (UL), unless the bank can demonstrate that it is adequately capturing EL in its internal business practices. That is, to base the minimum regulatory capital requirement on UL alone, the bank must be able to demonstrate to the satisfaction of the supervisory authority that it has measured and accounted for its EL exposure. (3) A bank’s risk measurement system must be sufficiently complete to capture the major drivers of operational risk affecting the shape of the tail of the loss estimates. (4) When calculating the regulatory minimum capital requirements, regulatory capital estimates for different operational risks must be added. However, the bank may be permitted to use internally determined correlations in operational risk losses across individual operational risk estimates, provided it can demonstrate to the satisfaction of supervisory authority that its systems for determining correlations are sound, implemented with integrity, and take into account the uncertainty surrounding any such correlation estimates (particularly when stress events occur). The bank must validate its correlation assumptions using appropriate quantitative and qualitative techniques. (5) Any operational risk measurement system must have certain key features to meet the soundness standard set out by the supervisory authority. These elements must include the use of internal data, relevant external data, scenario analysis and factors reflecting the business environment and internal control systems. (6) A bank needs to have a credible, transparent, well-documented and verifiable approach for weighting these fundamental elements in its overall operational risk measurement. The approach should be internally consistent and avoid the double counting of qualitative assessments or risk mitigants . For example, there may be cases where estimates of the 99.9th percentile confidence interval based primarily on internal and external loss event data would be unreliable for business lines with a heavy-tailed loss distribution and a small number of observed losses. In such cases, scenario analysis, and business environment and control factors, may play a more dominant role in the risk 217
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measurement system. Conversely, operational loss event data may play a more dominant role in the risk measurement system for business lines where estimates of the 99.9th percentile confidence interval based primarily on such data are deemed reliable.
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