Four federal agencies published a joint guidance on Friday to help banks comply with their “advanced approaches rule” from 2007, which requires certain firms to use a framework of advanced measurement approaches to calculate operational risk.

Under the rule, banks have the flexibility to develop operational risk measurement and management programs, processes, and tools that are tailored to their specific activities, business environments, and internal controls. Regulators expect that there will be "a narrower range of effective risk management and measurement practices" as banks build such programs, according to the Office of the Comptroller of the Currency's announcement.

“This interagency guidance discusses certain common implementation issues, challenges and key considerations for addressing these challenges in order to implement a satisfactory AMA framework,” said Timothy Long, senior deputy comptroller for bank supervision policy and chief national bank examiner at the OCC in the statement.

The 12-page document, published by the OCC, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, focuses on four kinds of data that the banks are required to use in their measurement. These are 1) internal operational loss event data, 2) external operational loss event data, 3) business environment and internal control factors, and 4) scenario analysis.

The guidance also discusses governance and validation, which are critical components for banks in ensuring their framework's integrity. “Validation should consider whether the conceptual framework, governance, measurement and monitoring systems, management reporting, and controls are appropriate for the firm's size, complexity, and business activities,” said the agencies in the document.

Topics