Revisions to the simpler approaches to operational risk: the need for enhanced disclosures and risk sensitive measures

The Business Indicator approach has been identified by the Basel Committee as the most suitable replacement for the Gross Income approach, since it addresses most of the Gross Income’s weaknesses, as well as possesses certain attributes which were highlighted to have been at the heart of the recent Financial Crisis. It had been highlighted by the Committee that weaknesses of the simpler approaches to operational risk, were attributed and generated principally from the use of Gross Income (GI) as a proxy indicator for operational risk exposure. This paper highlights rationales for revisions to the present framework of approaches to operational risk and why adjustments to the simpler approaches have become necessary. Further, as well as accentuating on why issues relating to calibration and adequate focus on Pillar III of Basel II, namely, market discipline, continue to dominate and feature as areas in need of greater attention, the paper also seeks to demonstrate why Pillar III may be that area which requires greater focus - where matters relating to goals of consistency, comparability and simplicity are involved. As well as consolidating on why gaps still persist in relation to disclosure requirements relating to operational risks, the paper will, more importantly, propose means of mitigating such gaps.