This final report presents the regulatory technical standards concerning the calculation of operational risk capital, introducing a new business indicator (BIC) that replaces previous methods. It details the components making up the BIC and the necessary adjustments during operations such as mergers and acquisitions. Implementation technical standards are also provided for mapping the BIC components with…
This document is the final report of the European Banking Authority (EBA) published in June 2025. It concerns draft regulatory technical standards (RTS) and implementing technical standards (ITS) regarding the Business Indicator (BI) and its components, under Articles 314 and 315 of Regulation (EU) No 575/2013 (CRR) amended by Regulation (EU) 2024/1623. The scope covers the definition of BI components, elements to exclude, BI adjustments in case of mergers, acquisitions or disposals, as well as the mapping of BI components with FINREP prudential reporting references. The document is based on about 42 initial pages of a total 125-page report, and targets European financial institutions subject to operational risk prudential requirements. The timeframe concerns the period after the entry into force of the amended regulation in 2024.
The main subject is the implementation of the new European regulatory framework for calculating capital requirements related to operational risk, based on the Business Indicator Component (BIC), which replaces previous approaches. This framework relies on the Business Indicator (BI), a financial proxy measure of an institution's business volume, decomposed into three components: interest, rents and dividends (ILDC), services (SC), and the financial component (FC). The EBA received mandates to specify precisely the BI constituent elements, possible exclusions, adjustments related to merger, acquisition or disposal operations, as well as the correspondence of BI elements with FINREP reporting cells. Key findings are: - The list of typical items for each component has been refined, notably considering IFRS 9 and IFRS 16 accounting standards evolutions and sector feedback. - For ILDC, revenues and expenses related to operating leases and investment properties are included, with clarifications on exclusions (e.g. losses related to modifications of finance leases). - For the services component, a detailed breakdown of operational risk event impacts in the income statement is provided, including losses, provisions, impairments, net of recoveries excluding insurance. - For the financial component, two approaches are planned: the accounting approach (AA) and the prudent approach based on the prudential boundary (PBA), the latter avoiding unjustified increases of FC due to economic hedging operations or accounting choices. - BI adjustments in case of merger or acquisition must include historical data over three years, with conservative alternatives if data are unavailable or inaccurate. For disposals, strict conditions are set to exclude BI elements, notably considering guarantee commitments and impact on operational risk management. - A materiality threshold of 5% of the total annual net operational impacts of disposals is introduced to simplify exclusion requests. - The mapping of BI components with FINREP cells is specified to ensure harmonized application. Conclusions stress the need for consistent and harmonized application of RTS and ITS, with notification processes to competent authorities for adopting the prudent approach and for adjustments related to merger/acquisition operations. Recommendations include adoption of RTS by the European Commission, followed by review by Parliament and Council, before official publication.
This report was prepared within the framework of implementing the European banking package which transposes Basel III reforms, notably the revision of capital requirements calculation for operational risk. The amended CRR introduces the Business Indicator Component (BIC) as the sole non-modelled method for this calculation, based on the Business Indicator (BI) reflecting an institution's business volume. The EBA was mandated to specify BI components, exclusions, adjustment modalities in case of merger, acquisition or disposal, as well as correspondence with FINREP reporting data. The document aims to ensure a harmonized and clear application of the new framework, while considering institutions' operational constraints. Limitations notably concern the availability and reliability of historical data for merger/acquisition operations, as well as the complexity of calculations related to the prudent approach. The report also responds to comments received during the three-month public consultation closed in May 2024, distinguishing prudential policy aspects from reporting issues.
Definition of Business Indicator (BI) components:
- The BI consists of three parts: interest, rents and dividends (ILDC), services (SC), and financial component (FC) (p. 3-4).
- ILDC: includes interest income and expenses, income related to operating leases under IFRS 16, dividends, and assets generating interest flows (p. 6-7).
- SC: calculated from other operating income and expenses, fees and commissions, with a detailed breakdown of operational risk event impacts in the income statement, including losses, provisions, impairments (p. 7-8).
- FC: sum of trading book (TC) and banking book (BC) components, calculated based on net results over three years (p. 8-9).
Approaches for the financial component:
- Accounting approach (AA) based on IFRS standards, assigning P&L to TC and BC components (p. 8-9).
- Prudent approach (PBA) based on the CRR prudential boundary, allowing to avoid unjustified FC increases due to economic hedging operations or accounting choices, under strict conditions (p. 9-11).
- Conditions for using PBA: existence of robust policies and procedures, prior notification to authorities, application over three years, prohibition of partial or alternating use with AA (p. 10-12).
Elements excluded from the BI:
- Exclusions provided by the CRR clarified, notably exclusion of income and expenses related to insurance risk-taking, but inclusion of income related to insurance product distribution (p. 10-11).
- Certain administrative expenses, outsourcing fees, impairments related to operational risks are not excluded (p. 11).
BI adjustments in case of merger, acquisition or disposal:
- Merger/acquisition: inclusion of historical data over three years of acquired entities, with recourse to conservative alternative methods (M&A factor based on net operating income, or financial forecasts) if data are unavailable or inaccurate (p. 12-16).
- Disposals: possibility to exclude elements related to disposed entities or activities under conditions, notably absence of guarantee commitments, impact on operational risk management, and approval by competent authorities (p. 16-18).
- Materiality threshold set at 5% of total annual net operational impacts of disposals, to simplify exclusion requests and reduce administrative burden (p. 18-19).
Mapping with FINREP:
- Detailed mapping of BI items with FINREP cells to ensure harmonized application and reduce operational costs (p. 19-20).
- Adjustments made to account for evolutions in accounting standards and institutions' practices (p. 19).
Findings:
- The BI is now the sole basis for calculating capital requirements for operational risk in the EU, according to the amended CRR (p. 3, 5).
- Three BI components are defined with precise item lists, considering IFRS standards and sector feedback (p. 6-8).
- Two approaches are possible for the financial component: accounting approach (AA) and prudent approach (PBA), the latter under strict conditions (p. 9-12).
- BI adjustments in case of merger/acquisition rely on historical data over three years, with conservative alternatives if data are missing or inaccurate (p. 12-16).
- Disposals can be excluded from the BI under conditions, with a 5% materiality threshold to simplify requests (p. 16-19).
Assumptions:
- Use of the M&A factor or financial forecasts as proxies in absence of historical data assumes a conservative approach (p. 14-16).
- The 5% threshold for disposals is based on monitoring data and aims to limit capital impact to less than 1% (p. 18-19).
Interpretations:
- The introduction of the PBA aims to correct accounting distortions that could artificially inflate the BI financial component (p. 9-11).
- The absence of a threshold for merger/acquisition adjustments reflects the desire for systematic consideration of these operations (p. 18).
Uncertainties:
- Availability and reliability of historical data for acquired entities may vary, requiring alternatives (p. 14-16).
- Correct and consistent application of the PBA depends on institutions' internal capacities to document and manage hedging relationships (p. 10-12).
- Operational and administrative impact of exclusion requests related to disposals remains to be monitored in practice (p. 18).
The EBA concludes that the proposed draft regulatory technical standards (RTS) and implementing technical standards (ITS) comply with the legal mandates of the amended CRR by specifying BI components, exclusions, adjustments in case of merger, acquisition or disposal, as well as the mapping with FINREP. These standards ensure harmonized and consistent application of the new framework for calculating capital requirements for operational risk in the European Union. The EBA recommends submitting these drafts to the European Commission for approval, followed by review by the European Parliament and the Council. Institutions must implement the policies, procedures, systems and controls necessary to apply notably the prudent approach (PBA) if they choose this option. They must also notify competent authorities in advance of their intention to use the PBA or to proceed with BI adjustments related to merger/acquisition operations. Finally, a materiality threshold is introduced to simplify exclusion procedures related to disposals, helping to reduce administrative burden. These measures aim to align capital requirements with the effective operational risk profile of institutions, while ensuring transparency and prudential supervision.
Synthesis note written from the full document by DataSAI Academy. This note comes from the scientific library of the DataSAI Academy, open to all.