Gross income is used as a broad indicator for the scale of a bank's operational risk exposure. The capital charge is calculated by multiplying gross income by a factor (denoted as alpha or beta). The factor serves as a proxy for the relationship between operational losses and the gross income of a bank. In the BIA gross income is measured on an aggregate basis, whereas in the STA or ASA gross income is measured for each business line, not the whole bank. The detailed measurement methodologies for each of the approaches are described in Basel II document from Para 645 to 659.

While the AMA as an approach incorporates extensive and sophisticated data assembly and models, the Agency has permitted its use as an option. Consequently, banks planning to implement the AMA should refer to the measurement methodology relative to data and models and other minimum measurement standards described in the Basel document from Para 664 to Para 679.Further guidance in this area would be made available in due course by SAMA.

Banks generally tend to manage operational risk on a business line basis. The business line management approach lends itself to a business line approach for partial use purposes. However, there may be valid reasons, such as the cost associated with implementing an AMA relative to the materiality of the risk, to exclude a legal entity that engages in the banks business lines but represents only a small part of each business line. Therefore, SAMA proposes to permit domestic banks to determine partial use on a business line or legal entity basis, or a combination of the two. Any activity that is excluded from the AMA calculation could not be included in the determination of group-wide diversification benefits within the AMA. For simplicity and ease of implementation, SAMA does not propose to make available other bases for determining partial use.

The operational risk section of the new Basel framework does not define the terms significant and material. It is left to national supervisory authorities to define these terms for their Banks.

SAMA defines “significant” as that part of a bank on operations that represents 75 percent of the Banks operational risk and “material” as that part representing 90 percent. It is proposed that a Banks should have five years from its implementation of an AMA to reach the 90 percent threshold and that it should demonstrate progress in moving from 75 percent to 90 percent during that period. A banks operational risk and these thresholds would be measured in terms of the minimum regulatory capital calculated using the Standardized Approach. This would require an AMA Bank to continue calculating capital using the Standardized Approach for up to 5 years post-implementation. SAMA accepts this proposal as both a practical and reasonable approach to the definition of “significant” and “material” for this section of the new Basel framework.

The new Basel framework permits the partial use of operational risk approaches only for banks implementing an AMA. However, the BCBS recognizes that there may be instances where a bank that chooses to adopt the Standardized Approach for its global, consolidated operations is required to implement an AMA for a branch operating in another jurisdiction. In these cases, a bank would be permitted to incorporate that AMA capital amount in its global consolidated capital calculation, with supervisory approval. SAMA proposes to make this flexibility available to its domestic banks, subject to any conditions laid out in the new Basel framework.

Apart from these instances, SAMA requires to permit a banks using the Standardized approach to use Basic Indicator Approach for parts of its operations on a transitional basis only, for a period not exceeding 3 years. SAMA would permit partial use only where the Bank can demonstrate that it is not being implemented for capital arbitrage purposes.

The new Basel framework allows a bank to adopt partial use between an AMA and the Standardized Approach or an AMA and the Basic Indicator Approach. However, SAMA proposes to permit a bank to choose either the Basic Indicator Approach or the Standardized Approach for a given part of the Bank not using the AMA, and would not restrict a Bank to only one of these approaches. This would be subject to the condition that the Bank is able to demonstrate that this partial use is not intended for capital arbitrage.

The new Basel framework does not specify whether the Alternative Standardized Approach can be used for partial use purposes. For greater clarity, SAMA does propose to allow banks operating in Saudi Arabia to use the Alternative Standardized Approach for any part of its operations in calculating its global, consolidated operational risk capital requirements.

[677-679] Consistent with the new Basel framework, SAMA proposes to permit banks using an AMA to recognize the risk mitigating impacts of insurance against operational risk. This amount is limited to 20 percent of the total AMA operational risk capital charge. A bank should meet the conditions stated in the new Basel framework to be eligible to use insurance as a risk mitigant.

SAMA has provided guidance in this area.