Reserve Bank of India Ordered Banks to Assess Basel-II Readiness

On April 27, 2011 RBI ordered the banks which are intending to migrate to advanced approach for computing capital charge for operational risk under Basel-II, to assess their preparedness to shift to the new approach. The Reserve Bank of India assures that banks can apply for migrating to the advanced approach from April 1, 2012 onwards. RBI has to perform a detailed analysis of the bank's risk management system and proposed model, prior to according approval.

Three methods to calculate operational risk

The risk of loss, resulting from inadequate or failed internal processes, people and systems or from external events results in operational risk. There are three kinds of methods to calculate operational risk in capital charge, under Basel II. These are (1) basic indicator approach, (2) standardized approach and (3) advanced measurement approach. Banks can continue with simpler approaches for computing their capital charge for credit and market risk even after their adoption of the advanced approach.