Minimum Capital Requirements for Operational Risk

The Standardized Approach The Banks must calculate minimum ORC requirements based on the Standardized Approach by multiplying the BIC and the ILM: ORC = BIC x ILM Where- (a) Business Indicator Component (BIC) is calculated as the sum of: (i) 12% of the Bank’s BI; (ii) if the Bank’s BI exceeds SAR 4.46 billion, 3% of the amount by which the BI exceeds SAR 4.46 billion; and (iii) if the Bank’s BI exceeds SAR 133.8 billion, 3% of the amount by which the BI exceeds SAR 133.8 billion; 2 BI is elaborated in section 7.2 (b) Internal Loss Multiplier (ILM) is calculated as follow: The explanation of ILM is given in section 7.3 Risk-weighted assets (RWA) for operational risk are equal to 12.5 times ORC. 2 For example, given a BI of SAR 140 billion, BIC = (SAR 140 billion x 12%) + [(SAR 140 billion – SAR 4.46 billion) x 3%] + [(SAR 140 billion – SAR 133.8 billion) x 3%] = (SAR 140 billion x 12%) + (135.54 billion x 3%) + (6.2) x 3%) = SAR 21.05 billion. 7.2 The Business Indicator The Business Indicator (BI) comprises of three components: the interest, leases and dividend component (ILDC); the services component (SC), and the financial component (FC). The BI is calculated as follow: BI = ILDC + SC + FC ILDC, SC and FC are calculated by the following formula: Where: A bar above a term indicates that it is calculated as the average over three years: t, t-1 and t-2. (Abs) is the absolute value of the terms within the brackets. The absolute value of net items must be calculated first for each financial year, and the average of the past three consecutive financial years must be calculated based on the absolute value of net items for each financial year. The definitions for each of the components of the BI are provided in Annexure 1 . This Article has been amended according to SAMA's circular No. (472014119), Dated 01/03/1447H, corresponding to 24/08/2025G . 7.3.1 A bank’s internal operational risk loss experience affects the calculation of operational risk capital through the Internal Loss Multiplier (ILM). The ILM is defined as below, where the Loss Component (LC) is equal to 15 times average annual operational risk losses incurred over the previous 10 years: 7.3.2 The ILM is equal to one where the Loss Component (LC) and Business Indicator Component (BIC) are equal. Where the LC is greater than the BIC, the ILM is greater than one. That is, a bank with losses that are high relative to its BIC is required to hold higher capital due to the incorporation of internal losses into the calculation methodology. Conversely, where the LC is lower than the BIC, the ILM is less than one. That is, a bank with losses that are low relative to its BIC is required to hold lower capital due to the incorporation of internal losses into the calculation methodology. 7.3.3* The calculation of average losses in the Loss Component must be based on (10) years of high-quality annual loss data. When banks first become subject to calculation of the ILM, banks that do not have (10) years of high-quality loss data may use a minimum of (5) years of data to calculate the LC. Banks that do not have five years of high-quality loss data must calculate the capital requirement based solely on the BI component. Further, those Banks that do not have high-quality annual loss data for (5) years are required to approach SAMA to seek approval either to use loss data for the period less than (5) years or use ILM greater than (1) or as advised by SAMA.