Standard approach
In finance, a standard approach is usually understood to be the calculation methods prescribed by supervisory law for risks such as credit risk , market risk and operational risk , with the help of which the backing with equity capital can be calculated.
General
The Capital Adequacy Regulation (CRR) , which has been in force in the EU since January 2014 , generally distinguishes between the standardized approach and advanced approaches. With the standard approach, the calculation methods are prescribed by law; with the advanced approaches, the institute's own calculation methods based on internal and / or external data sources are permitted. The application of the standardized approaches is required by law as a rule, while the more advanced approaches require approval by the banking supervisory authority .
Credit risk
In order to limit the credit risk, the Capital Adequacy Ordinance contains minimum capital requirements for credit risks . They know the
- Credit Risk Standard Approach (KSA): the risk parameters of the probability of default (PD) and the loss of default rate (LGD) are specified by the banking supervisory authority. According to Art. 113 (1) CRR, the rating is to be adopted by recognized external rating agencies and determines the third risk parameter, the default credit amount (EaD).
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Internal ratings-based approach (IRBA): here the regulatory requirements for the risk parameters are gradually dispensed with, whereby
- with the basic IRBA (F-IRBA) only the assumption of ratings from the rating agencies is omitted, so that the PD itself must be estimated, and
- With the advanced IRBA (A-IRBA), all requirements are omitted, so that all risk parameters must be calculated by the institution itself.
The standardized approach applies to all credit institutions unless they are approved by the banking supervisory authority in accordance with Art. 143 CRR.
Market risk
According to Art. 325 ff. CRR, market risks must also be backed with own funds. The market risk standard approach (MRSA, English market risk standardized approach ) determines the regulatory capital requirement for specific market risk in the trading book . Permission to use internal models can be granted in accordance with Art. 363 CRR.
Operational risk
According to Art. 4 No. 52 CRR, operational risk is the risk of losses caused by the inappropriateness or failure of internal processes , people and systems or by external events , including legal risks .
From Art. 312 CRR to Art. 324 CRR, various approaches with different degrees of risk sensitivity and differentiation are provided. This should give the institutions appropriate incentives to switch to approaches with a higher risk sensitivity. A combination of different approaches is possible according to Art. 314 Para. 1 CRR.
There are three types of operational risk approach:
- With the standardized approach, a total of 8 business areas are identified in Art. 317 CRR, for which the capital adequacy is 12%, 15% or 18% of the indicator. According to Art. 316 CRR, certain income and expenses from the income statement are considered indicators . The values of positive business areas can offset the values of negative business areas.
- With the basic indicator approach , 15% of the three-year average of the indicator has to be backed with equity according to Art. 315 (1) CRR. In order to be able to use the alternative standardized approach, the conditions listed in Art. 319 (2) CRR must be met. For each of the past three years, a partial credit amount is determined in which the gross income of the individual business areas is multiplied by the so-called beta factor specified in the CRR and then added:
- Are in it
- : Partial credit amount
- : Gross income
- The advanced measurement approaches are regulated in Art. 321 ff. CRR. The loss events according to Art. 324 CRR only apply to the advanced measurement approaches and relate to internal or external fraud , employment practices and job security , customers / products / business practices, property damage , business interruptions and system failures as well as execution / delivery / process management .
meaning
The standard approaches are suitable for credit institutions that are smaller in terms of their size, such as small to medium-sized savings banks , cooperative banks or private banks . However, the application of the standardized approaches is associated with the lowest risk sensitivity and sophistication, so that the standardized approaches tend to lead to a higher capital charge than the advanced approaches, which require approval by the banking supervisory authority.
The use of the standardized approach must be reported to BaFin and the Deutsche Bundesbank . A prerequisite for use is the fulfillment of some qualitative requirements for the management of operational risks. The use of the alternative standard approach must be approved by BaFin .
