EBA's New Operational Risk Framework: A Game-Changer for Financial Institutions

The European Banking Authority (EBA) is shaking up the world of operational risk management with its latest consultation paper. The proposed draft Regulatory Technical Standards (RTS) aims to significantly overhaul how banks and financial institutions under the revised Capital Requirements Regulation (CRR3) approach this critical area. Let's delve into the fundamental changes and what they mean for your firm.

1. Risk Taxonomy: A Standardized Approach

The EBA is introducing a standardised risk taxonomy for classifying operational risk losses. This taxonomy is built upon:

• Level 1 Event Types: Broad categories of operational risk events consistent with international standards.

• Level 2 Categories: More detailed breakdowns of the event types, providing greater granularity.

• Attributes: Additional information to enhance flexibility and regulatory oversight.

This standardised approach aims to improve consistency and comparability of loss data across institutions, making it easier for regulators to assess and monitor operational risk.

2. "Unduly Burdensome" Exemptions:

Recognising that operational risk calculations can be resource-intensive, the EBA proposes exemptions for certain institutions. If your firm's Business Indicator (BI) falls between €750 million and €1 billion, and the calculation of annual operational risk loss proves "unduly burdensome," you may be eligible for a waiver. This is particularly relevant for firms that have recently undergone mergers or acquisitions.

3. Adjustments for Mergers and Acquisitions:

The draft RTS also guide incorporating loss data from merged or acquired entities, ensuring a smooth transition and accurate risk assessment. This includes converting loss data into the reporting institution's currency and aligning it with the standardised risk taxonomy.

What This Means for Your Firm:

• Data Management Overhaul: Revamp your data collection and reporting systems to align with the new risk taxonomy.

• Capital Calculation Review: Reassess your operational risk capital requirements, mainly if you've relied on different approaches in the past. The "unduly burdensome" exemption could be a game-changer for some firms.

• Operational Resilience in Focus: The emphasis on loss data collection reinforces the importance of solid risk management practices. Take this opportunity to review and strengthen your operational risk controls.

• ESG Integration: Factor environmental, social, and governance (ESG) considerations into your risk assessments, as these are now explicitly included in the risk taxonomy.

Act Now:

The EBA is seeking feedback on these draft RTS. Your firm's participation in this consultation process is crucial to shaping the final standards. Stay ahead of the curve and ensure you're prepared for the changes.