BIC: The Business-Indicator Component Heard Around The Globe
One wrinkle is that there are really two requirements. On February 20th of this year, the EBA published a set of consultation papers that proposed:
- Amendments to the operational risk Pillar 3 disclosures (EBA/CP/2024/06) and supervisory reporting requirements (EBA/CP/2024/07) to implement Basel III reforms; public consultation runs through April 30, 2024.
- A new framework for the business indicator for operational risk (EBA/CP/2024/05) as part of the implementation of the EU Banking Package; public consultation runs through May 21, 2024.
BIC requirement goes live on January 1, 2025, with first reporting on March 31, 2025. For EU reporting entities subject to CRD IV and new CRR3 reporting requirements, the time to prepare is now.
The EBA is also conducting a quantitative impact study (QIS) in parallel with the public consultations to assess their impacts. Feedback and QIS results will be considered as the draft Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) are finalized.
The EBA has tried to align them to help institutions comply with both requirements and mapped the revised disclosure and reporting templates – an alignment that should promote consistency and comparability for internationally active banks. However, this leaves EU banks in need of a comprehensive reporting and risk-weighted asset (RWA) calculation solution that addresses the revised framework requirements for operational risk, simplifies and automates reporting, while maintaining accuracy.
Why are the proposals important?
The proposed requirements have far-reaching impacts on the reporting organizations that must source P&L information used as the inputs for assessing the Basel operational risk-capital charge. This change also brings technical and functional challenges as they work to implement the EBA’s revised operational risk framework. Critically, this mandate cannot be pushed aside, and time is short.
The proposals establish updated technical calculation methodologies and reporting requirements in relation to the EBA’s revised operational risk method. They also specify the relationship to FINREP P&L reports for the sourcing of data for each business indicator component (BIC), illustrating the expectation of consistency across FINREP and COREP as well as the opportunity for developing integrated systems that automate these relationships.
Further, they detail:
- Updated technical standards for the calculation of operational risk under the new BIC approach, which fully replaced prior operational risk methodologies under CRR2.
- Replacement reporting requirements for operational risk under EBA COREP, i.e. a revised set of C16.x reporting templates.
What are the regulations’ key functional drivers?
The EBA’s launch of RTS and Implementing ITS drafts with the aims “to clarify the composition of the new business indicator; map, where possible, the typical components of the indicator to their corresponding reporting cells financial reporting (FINREP) items; and highlight any possible adjustments to the business indicator in case of specific operations.” (i.e., mergers, acquisitions, and disposals). See: https://www.eba.europa.eu/publications-and-media/press-releases/eba-consults-amendments-operational-risk-pillar-3-and
In terms of the business indicator adjustments, the RTS draft requires “institutions to use the actual three-year historical data or a limited number of alternative methodologies following an operation;” for disposals, it “specifies conditions under which permission to exclude business indicator items related to disposed entities or activities may be granted.” See: https://www.eba.europa.eu/publications-and-media/press-releases/eba-consults-new-framework-business-indicator-operational
What are the technical challenges created by the new BIC approach?
Institutions face several key challenges.
- Sourcing of the data behind various business indicators for input into the operational risk capital-charge calculations from EBA-specified FINREP report guidelines.
- Addressing new supervisory reporting and disclosure requirements for operational risk under CRR3, including losses, business indicator and related own-funds requirements, and risk-exposure amounts.
- Managing interpretations and regional deviations in the BCBS’ operational risk methodology for organizations with multi-jurisdictional Basel capital-management and reporting requirements.
How do we help you resolve these challenges?
New clients would also benefit from having a unified solution for risk and FINREG-related reporting requirements that would provide:
- A single operational-risk module that performs risk calculations in compliance with multiple jurisdictions including BCBS, EU/EBA, Malay BNM, and UK PRA rules, and US Basel III Endgame, among others.
- An out-of-the-box connector module that bridges in-source data from FINSTAT FINREP data points, as per the EBA publications, to minimize implementation efforts and ensure consistency across regulatory requirements.
For banks operating in the US, there is a similar connector that bridges the operational-risk module to the FR Y-9C and core reports. Similar functionality is available for other applicable jurisdictions.
