2012-03-15
The procedure for issuing permissions to apply the operational risk advanced measurement approach
Taking into consideration, the new requirements of the European Banking Authority, the Board of the Bank of Lithuania amended the Procedure for Issuing Permission to Apply Internal Rating-Based Credit Risk Assessment Approach and Operational Risk Advanced Measurement Approach. The procedure is applicable to the banks that have a license of the Bank of Lithuania and the Central Credit Union of Lithuania or the group of a parent bank belonging to a financial group that wish to apply the foundation or advanced internal rating-based credit risk assessment approach (IRB) and/or the operational risk advanced measurement approach (AMA) when calculating capital adequacy.
The document that was supplemented today provides that the banks applying or planning to apply the AMA approach that do not have parent banks in other EU Member States must prepare the AMA change policy, including the measurement of their reliability, proper documentation, distribution of responsibility and independent review of the AMA changes. The requirements were established how the bank should classify potential AMA changes by their importance to established categories, as well as potential criteria based on which the bank should perform such classification.
The banks that have parent banks in other EU Member States, upon receiving permission to apply the AMA approach in the financial group, will not prepare a separate AMA change policy, however, they will need to prove that they will be able to apply the financial group’s AMA change policy.
The document defines the potential actions of the Bank of Lithuania, depending on the importance of the planned AMA changes. In those cases when the bank plans to implement AMA extensions or significant changes, it is necessary to obtain permission of the Bank of Lithuania in advance. The bank may be additionally instructed to improve AMA changes or to perform a parallel calculation of the capital requirement, so that it is possible to assess the quantitative impact of AMA changes on the capital base. It is not necessary to obtain permission for the implementation of important AMA changes, however it is necessary to obtain the reply of the Bank of Lithuania that it does not object to the implementation of changes. Insignificant AMA changes may be implemented without advance permission or the reply of the Bank of Lithuania concerning non-objection to their implementation, and such changes should be notified to the Bank of Lithuania once per year.