Operational risk capital estimation under BIA and TSA: a study of public sector and private sector banks in India

Abstract

In line with Basel and Reserve Bank of India (RBI) directives, all banks in India implemented basic indicator approach (BIA) of operational risk capital computation by March 2009. RBI issued guidelines on The standardised approach (TSA) of operational risk in March 2010. In this paper, an attempt is made to estimate Operational Risk Capital Charges (ORCCs) of Public Sector and Private Sector Banks in India for the period from 2003–2004 to 2012–2013 under both, BIA and TSA. The results of this study indicate that operational risk capital charges vary, depending upon bank’s size, despite of risk management systems in place. The capital computation of banks using BIA and TSA proves onerous for large banks like State Bank of India and ICICI Bank. The study also points out that capital adequacy ratio (CAR) and Tier I capital ratio of the banks have declined with introduction of additional capital charges for operational risk. Hence, this paper suggests that it is important for banks to have a well-defined business line mapping framework in place, for implementation of TSA approach.