Implementing the EU Capital Requirement Directive – key operational risk elements
| Published date | 01 December 2005 |
| Date | 01 December 2005 |
| Pages | 313-323 |
| DOI | https://doi.org/10.1108/13581980510635546 |
| Author | Andrew Sheen |
| Subject Matter | Accounting & finance |
Implementing the EU Capital Requirement
Directive — key operational risk elements
Andrew Sheen
Operational Risk Policy Team at the FSA
Andrew Sheen is a member of the Opera-
tional Risk Policy Team at the Financial
Services Authority. He joined the Authority
following a lengthy period in the banking
industry, where he gained experience in a
wide variety of risk management functions
while working for central, investment,
wholesale and retail banks. In the 7 years
prior to joining the FSA he focussed on
developing and implementing Operational
Risk systems and frameworks in prepara-
tion for the implementation of Basel II and
the EU Capital Requirement Directive.
ABSTRACT
KEYWORDS: Risk management, regula-
tion, European legislation, banking
Basel II and the EU CRD introduce, for the
first time, specific Operational Risk require-
ments for credit institutions and investment
firms. With less than 2 years available to pre-
pare for the introduction of the simpler Opera-
tional Risk approaches, some firms would find
it useful for the FSA to prescribe specific
detailed Operational Risk standards that could
be taken into account whilst preparing for the
implementation of the EU Directive. However
a variety of considerations, including differences
between firms in terms of size, scale of activity
and complexity and uncertainties over the final
version of the Directive, will prevent the FSA
from prescribing a detailed range of qualitative
Operational Risk standards.
This paper seeks to identify the general
Operational Risk standards currently embodied
in the Basel and EU documents and to distil
these standards into ten qualitative Operational
Risk elements that are likely to be considered
by the FSA as part of any assessment of a
firm’s Operational Risk framework. Given the
variables and uncertainties that will impact on
the FSA’s expectations for specific firms this
paper reflects the authors’ views and not the
corporate views of the FSA.
INTRODUCTION
The Basel Committee on Banking Super-
vision’s (BCBS) report ‘International Con-
vergence of Capital Measurement and
Capital Standards’ (Basel II) and the Eur-
opean Union’s ‘Capital Requirements
Directive’ (CRD) introduce, for the first
time, a capital charge for Operational
Risk, while also imposing specific Opera-
tional Risk qualitative requirements on
firms
1
.
Although some — but not all — firms
would find it useful for the FSA to publish
specific detailed Operational Risk standards
that must be met, a number of considera-
tions preclude this possibility. For example,
differences exist between firms in terms of
size, scale of activity and complexity. In
addition, the FSA remains in discussion
with industry about CRD implementation,
while the general UK Operational Risk
requirements will only be known follow-
ing finalisation of the Directive, and the
Page 313
Journal of Financial Regulation and Compliance Volume 13 Number 4
Journal of Financial Regulation
and Compliance, Vol. 13, No. 4,
2005, pp. 313–323
#Emerald Group Publishing
Limited, 1358–1988
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