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7.3 The Internal Loss Multiplier

No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force

Effective from Jan 01 2023 - Dec 31 2022
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7.3.1A 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:
 

 
7.3.2The 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.
 
7.3.3The calculation of average losses in the Loss Component must be based on 10 years of high-quality annual loss data. As part of the transition to the standardized approach, banks that do not have 10 years of high-quality loss data may use a minimum of five years of data to calculate the Loss Component, however, the term for transition will require SAMA’s approval. 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 five years or use ILM greater than 1 or as advised by SAMA.
 
7.3.4The Banks with a BI less than or equal to SAR 4.46 billion must set the ILM equal to 1 in the calculation of ORC requirement (that is, calculate ORC based solely on the BIC), unless the Bank has obtained the SAMA’s written approval to calculate the ILM in accordance with paragraph 7.3.1 for the calculation of ORC. SAMA will not grant such approval unless the Bank meets all the criteria set out in sections 8 to 12.