Australian Prudential Standard APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk – Overview and Summary of Requirements
Instituted in November 2007 under the Banking Act, the Australian Prudential Standard, APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk, gives the requirements that authorized deposit taking institutions must meet both at the time of initial implementation and on an ongoing basis for regulatory capital purposes.
Applicability
This Prudential Standard applies to authorized deposit taking institutions (ADI) that are seeking or have been given approval to use an advanced measurement approach (AMA) to operational risk for the purpose of determining regulatory capital.
What is an AMA?
An AMA is an advanced approach used to measure an ADI’s regulatory capital for operational risk that has been approved by the Australian Prudential Regulation Authority (APRA).
What is operational risk?
According to the Prudential Standard, operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, from external events. Operational risk includes legal risk but not strategic and reputational risks.
The operational risk management framework is the organizational structures, processes and systems used in identifying, assessing, measuring, monitoring, controlling and mitigating operational risk.
Key Principles for Complying with this Standard
ADIs that receive approval from the APRA to use an AMA must:
- Have in place a robust operational risk management framework and a conceptually sound operational risk measurement system
- Hold regulatory capital proportionate with its exposure to operational risk.
Adopting the Advanced Management Approach
The APRA generally requires approved ADIs to apply the Advanced Management Approach or AMA across all business activities.
An ADI can use a combination of the AMA and the standardized approach to operational risk for measuring its ORRC (an approach referred to as partial use) in cases where an ADI:
- Moves from the standardized approach to operational risk
- Undertakes a new business activity
- Has acquired a new business through a merger or acquisition
- Has certain immaterial business activities
Summary & Overview of Requirements
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Operational Risk Management Framework
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Operational Risk Measurement System
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An ADI’s operational risk measurement framework must be:
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ORRC (Operational Risk Regulatory Capital)
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Board of Directors and Senior Management
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Documentation
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The operational risk management framework should be documented comprehensively and in detail
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Internal reporting
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The ADI must implement a process of regular, internal monitoring of its operational risk profile
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Independent review
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The operation risk management framework must be reviewed independently during:
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