BI Component( Basel Committee)

[saurabhpal49]

hi David

In the BI Component calculation Bucket 1 has a multiplier of 0.11 and Bucket 2 has a multipler of 0.15
In the reading it's mentioned that 0.15 is the internal loss multiplier and it's also mentioned that Bucket 1 doesn't depend on internal losses
So in that case what is 0.11 ( since it should not be internal loss multiplier, As it does not depend on internal losses)

Thanks

 

[David Harper CFA FRM]

Hi @saurabhpal49 Previously the OpRisk capital charge was (I am simplifying) = [Gross Income] * α, where α was a fixed multiplier (0.15), because GI was the indicator whose magnitude determined the Operational VaR, so to speak. The new SMA, as a first approximation, replaces GI*α with BI*["progressive" α] where BI is the business indicator but it's also just a "super-adjusted" GI and the "progressive α (i.e., multiplier)" is an increasing function of the BI bucket. I am calling this a progressive multiplier because it's like progressively higher marginal tax rates: the previous single multiplier of 0.15 is still increasing linearly with GI (and in theory, therefore, somewhat with bank size), but the SMA wants to increase the multiplier with bank size so the relationship is non-linear; e.g., bucket 1 multiplier is 0.11 but bucket 2 "steps up" to 0.15 such that the "spillover" BI (the BI above $1.0 billion and less than $3.0 billion) is charged with the higher multiplier. The correct language here is that the BI component(BIC) = business indicator (BI) * [weight or multiplier | bucket]. Now, the BIC is multiplied by the internal loss multiplier (ILM) which is based on the bank's own internal loss history (none of the above so far has directly done that), however, the first bucket (which is the smallest banks) does not have its BIC multiplied by ILM, which is akin to saying it's IML is assigned 1.0, which is anyhow the ILM is would determine if its internal loss history was exactly average. I hope that clarifies!

 

[saurabhpal49]

Thanks David