CP10 (Full Document) - European Banking Authority
CP10 (Full Document) - European Banking Authority
CP10 (Full Document) - European Banking Authority
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incorporate forwardlooking elements, to replace missing<br />
quantitative data, or to conduct scenario analysis, etc.).<br />
4.3.4.3. Insurance haircuts for policies with a residual term less<br />
than one year<br />
462. The CRD allows institutions to use insurance as an operational risk<br />
mitigation technique. In order to be eligible for this purpose, the<br />
insurance policy must have an initial term of one year or less (Annex<br />
X, Part 3, Paragraph 27a). For policies with a residual term of less<br />
than one year, the institution must make appropriate haircuts<br />
reflecting the declining residual term of the policy, up to a full 100%<br />
haircut for policies with a residual term of 90 days or less.<br />
463. However, this haircut is not required if the contract stipulates that<br />
the policy has an automatic renewal option with terms and conditions<br />
similar to the current terms and conditions, and has a cancellation<br />
period on the part of the insurer of no less than one year.<br />
4.3.4.4. Allocation methodology for AMA institutions on a groupwide<br />
basis<br />
464. When an EU parent institution and its subsidiaries, or the subsidiaries<br />
of an EU parent financial holding company, intend to use the AMA to<br />
calculate operational risk capital requirements on a groupwide basis,<br />
their application shall include a description of the methodology that<br />
will be used to allocate operational risk capital between the different<br />
entities of the group (Annex X, Part 3, Paragraph 30). This<br />
methodology must allocate capital from the consolidated group level<br />
downwards to subsidiaries that are involved in the consolidated AMA<br />
calculation process. Institutions should demonstrate that they have<br />
sound and rational methodologies for allocation and that they are<br />
implemented consistently, fairly, and with integrity. Institutions are<br />
strongly encouraged to move towards allocation mechanisms that<br />
properly reflect the operational riskiness of the subsidiaries and their<br />
actual contribution to the consolidated capital charge. The allocation<br />
mechanism should be a significant component of the assessment of<br />
the application by the home supervisor and relevant host<br />
supervisors, including diversification and correlation effects.<br />
4.3.5. Internal governance<br />
465. Operational risk management differs from credit risk management,<br />
reflecting fundamental conceptual differences between operational<br />
risk and credit risk.<br />
466. Operational risk is inherent in every activity performed by an<br />
institution and in every part of its organisation, while credit risk is<br />
localized in portfolios. Credit risk is actively taken, in order to<br />
generate income, while operational risk is taken on passively and is<br />
inherent in every activity performed by an institution. The amount of<br />
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