Basel Committee on

Banking Supervision

OPE
Calculation of RWA for
operational risk
OPE10
Definitions and application

Version effective as of
01 Jan 2023
Reflects revised standardised approach
introduced in the December 2017 Basel III
publication (including the revised implementation
date announced on 27 March 2020) and removal
of internal model approaches. FAQ published on
30 March 2023 added.
This document has been generated on 05/26/2024 based on the Basel Framework data available on
the BIS website (www.bis.org).

© Bank for International Settlements 2024. All rights reserved.

Definition of operational risk

10.1 Operational risk is defined as the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events. This definition includes legal risk,1
but excludes strategic and reputational risk.
Footnotes
1 Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive
damages resulting from supervisory actions, as well as private settlements.

Definition of Business Indicator components

10.2 Table 1 defines the components of the Business Indicator (BI).

Business Indicator definitions Table 1

BI component Income statement or balance Description Typical sub-items

sheet items

Interest, lease and Interest income Interest income from all financial
dividend assets and other interest income Interest income from
loans and advances,
(includes interest income from
assets available for sale,
financial and operating leases and
assets held to maturity,
profits from leased assets) trading assets, financial
leases and operational
leases
Interest income from
hedge accounting
derivatives
Other interest income
Profits from leased assets

Interest expenses Interest expenses from all

financial liabilities and other Interest expenses from
interest expenses (includes deposits, debt securities
issued, financial leases,
interest expense from financial
and operating leases
and operating leases, depreciation
Interest expenses from
and impairment of, and losses
hedge accounting
from, operating leased assets) derivatives
Other interest expenses
Losses from leased assets
Depreciation and
impairment of operating
leased assets

Interest earning assets Total gross outstanding loans, advances, interest bearing securities
(balance sheet item) (including government bonds), and lease assets measured at the
end of each financial year

Dividend income Dividend income from investments in stocks and funds not
consolidated in the bank's financial statements, including dividend
income from non-consolidated subsidiaries, associates and joint
ventures.

Services Fee and commission income Income received from providing

advice and services. Includes
Fee and commission income
income received by the bank as an
from:
outsourcer of financial services.

Securities (issuance,
origination, reception,
transmission, execution

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 of orders on behalf of
customers)
Clearing and settlement;
Asset management;
Custody; Fiduciary
transactions; Payment
services; Structured
finance; Servicing of
securitisations; Loan
commitments and
guarantees given; and
foreign transactions

Fee and commission expenses Expenses paid for receiving advice

and services. Includes outsourcing
Fee and commission expenses
fees paid by the bank for the
from:
supply of financial services, but
not outsourcing fees paid for the
supply of non-financial services
(eg logistical, IT, human resources) Clearing and settlement;
Custody; Servicing of
securitisations; Loan
commitments and
guarantees received; and
Foreign transactions

Other operating income Income from ordinary banking

operations not included in other Rental income from
BI items but of similar nature investment properties
Gains from non-current
(income from operating leases
assets and disposal
should be excluded) groups classified as held
for sale not qualifying as
discontinued operations
(IFRS 5.37)

Other operating expenses Expenses and losses from

ordinary banking operations not Losses from non-current
included in other BI items but of assets and disposal
similar nature and from groups classified as held
operational loss events (expenses for sale not qualifying as
from operating leases should be discontinued operations
excluded) (IFRS 5.37)
Losses incurred as a
consequence of
operational loss events
(eg fines, penalties,
settlements, replacement
cost of damaged assets),
which have not been
provisioned/reserved for
in previous years
Expenses related to
establishing provisions/
reserves for operational
loss events

Financial Net profit (loss) on the trading

book Net profit/loss on trading assets and trading liabilities
(derivatives, debt securities, equity securities, loans and
advances, short positions, other assets and liabilities)
Net profit/loss from hedge accounting
Net profit/loss from exchange differences

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 Net profit (loss) on the
banking book Net profit/loss on financial assets and liabilities measured at
fair value through profit and loss
Realised gains/losses on financial assets and liabilities not
measured at fair value through profit and loss (loans and
advances, assets available for sale, assets held to maturity,
financial liabilities measured at amortised cost)
Net profit/loss from hedge accounting
Net profit/loss from exchange differences

FAQ
FAQ1 Should credit obligations on non-accrued status (eg non-performing loans) be
classified as interest-earning assets for purposes of the calculation of Interest, Leases,
and Dividend Component of the BI?
Yes. All outstanding credit obligations in the balance sheet, including credit obligations
on non-accrued status (eg non-performing loans), should be included in interest-
earning assets for the purposes of the calculation of Interest, Leases, and Dividend
Component of the BI.

10.3 The following profit and loss items do not contribute to any of the items of the BI:
(1) Income and expenses from insurance or reinsurance businesses.
(2) Premiums paid and reimbursements/payments received from insurance or reinsurance
policies purchased.
(3) Administrative expenses, including staff expenses, outsourcing fees paid for the supply
of non-financial services (eg logistical, human resources, information technology – IT),
and other administrative expenses (eg IT, utilities, telephone, travel, office supplies,
postage).
(4) Recovery of administrative expenses including recovery of payments on behalf of
customers (eg taxes debited to customers).
(5) Expenses of premises and fixed assets (except when these expenses result from
operational loss events).
(6) Depreciation/amortisation of tangible and intangible assets (except depreciation related
to operating lease assets, which should be included in financial and operating lease
expenses).
(7) Provisions/reversal of provisions (eg on pensions, commitments and guarantees given)
except for provisions related to operational loss events.
(8) Expenses due to share capital repayable on demand.
(9) Impairment/reversal of impairment (eg on financial assets, non-financial assets,
investments in subsidiaries, joint ventures and associates).
(10) Changes in goodwill recognised in profit or loss.
(11) Corporate income tax (tax based on profits including current tax and deferred).
FAQ
FAQ1 Should income and expenses from insurance activities where the bank acts as an
intermediary (rather than the insurance provider) be excluded from the Business
Indicator?

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 No. When the bank acts as an insurance intermediary and, therefore, is not the
insurance provider (ie the risk taker), the related income and expenses are not
excluded from the Business Indicator. On the other hand, income and expenses from
the bank’s insurance or reinsurance business (ie relating to activities where a bank
acts as the insurance provider) are excluded.

Application of the standardised approach within a banking group

10.4 At the consolidated level, the standardised approach calculations use fully consolidated BI
figures, which net all the intragroup income and expenses. The calculations at a sub-
consolidated level use BI figures for the banks consolidated at that particular sub-level. The
calculations at the subsidiary level use the BI figures from the subsidiary.

10.5 Similar to bank holding companies, when BI figures for sub-consolidated or subsidiary
banks reach bucket 2, these banks are required to use loss experience in the standardised
approach calculations. A sub-consolidated bank or a subsidiary bank uses only the losses it
has incurred in the standardised approach calculations (and does not include losses
incurred by other parts of the bank holding company).

10.6 In case a subsidiary of a bank belonging to bucket 2 or higher does not meet the qualitative
standards for the use of the Loss Component, this subsidiary must calculate the
standardised approach capital requirements by applying 100% of the BI Component. In
such cases supervisors may require the subsidiary to apply an internal loss multiplier which
is greater than 1.

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