For decades, the international financial system has faced episodes that have pushed the global economy to the brink of collapse. In every crisis, a familiar pattern emerges: institutions with seemingly solid balance sheets, complex risk structures, and a false sense of stability that ultimately exposes deep vulnerabilities.
From those lessons emerged one of the most significant standards in the history of modern banking regulation: the capital requirement.
The bank failures of recent decades revealed that many institutions lacked sufficient capital to absorb significant losses.
The most emblematic case was Lehman Brothers in 2008. Its exposure to high-risk mortgages and complex financial derivatives triggered a complete loss of market confidence. Without the necessary capital to meet its obligations, its collapse set off a global crisis that still serves as a reference point for regulators and risk managers today.
Years later, in 2017, Banco Popular Español faced a similar situation. Non-performing loans and poor risk management eroded its capital position to the point that the European Union ordered its resolution and sale for one euro. This case demonstrated that even long-established institutions are not immune to systemic risk.
In 2023, the collapse of Silicon Valley Bank brought the issue back into focus. The bank had concentrated its investments in long-term government bonds, failing to anticipate the impact that rising interest rates would have on their market value. When clients began withdrawing their deposits, the bank lacked the liquidity and capital to respond—resulting in one of the largest bank failures in U.S. history.
These events exposed a structural weakness: the insufficient capital capacity to absorb losses and maintain operational stability.
That vulnerability led to the creation of the Basel regulatory framework, which established international standards to determine how much capital financial institutions must hold based on the risks they assume.
Capital requirement is the minimum level of own funds that a financial institution must hold to cover losses arising from its credit, market, and operational risks, ensuring its solvency during periods of stress.
Practically speaking, this capital serves as a safety cushion, designed to absorb unexpected losses and protect both depositors and the stability of the financial system.
The Basel Committee on Banking Supervision (BCBS), composed of leading global regulators, established this principle with a central objective: to guarantee the resilience of the global financial system.
Capital is not merely an accounting requirement; it is a measure of confidence, solvency, and institutional discipline.
Compliance with these requirements is essential because it:
Preserves the institution’s solvency under adverse scenarios.
Protects depositors and maintains public trust.
Reduces systemic risk, preventing the failure of one institution from contagion to the rest of the system.
Aligns operations with the international standards set by Basel II, III, and IV.
In essence, the capital requirement reflects the maturity of a management approach that seeks a balance between profitability, risk exposure, and long-term stability.
The measurement of capital for operational risk has evolved with each version of the Basel framework.
The three main models —BIA, TSA, and SMA— reflect different levels of complexity depending on the information available, the maturity of risk management, and the operational structure of each institution.
The BIA, introduced in Basel II, is the simplest model and the starting point for institutions seeking to meet the minimum capital requirements for operational risk.
The methodology is based on a single formula:
Capital Requirement = 15% × Average Gross Income over the last three years
This approach assumes that operational risk is correlated with the bank’s income volume, without distinguishing between business lines or types of risk.
Why it is useful:
The BIA is ideal for smaller entities or those in the early stages of regulatory maturity, as it does not require complex databases or detailed segmentation.
It allows for quick and simple compliance with regulations, establishing a foundation to evolve toward more advanced models.
Why it has limitations:
By treating all income equally, it does not reflect the actual exposure of each business line nor does it encourage granular risk management. Therefore, the BIA is a compliance solution, but not a capital optimization tool.
The TSA, also developed under Basel II, represents a significant advancement. Instead of a single percentage, the model divides the bank’s operations into eight business lines (corporate banking, retail banking, trading, payment services, etc.) and assigns each one an operational risk coefficient (between 12% and 18%) applied to its gross income.
Formula:
Capital Requirement = Σ (Gross Income of the Line × β)
where β represents the coefficient defined by Basel for each activity.
Why it is more accurate:
This approach recognizes that not all areas of a bank are exposed to the same level of risk.
By segmenting, it allows identification of where operational risk is concentrated and enables capital allocation in proportion to that exposure.
Key requirements:
Accounting information broken down by business line.
Consistent, verifiable, and traceable records.
The TSA is ideal for institutions that already have mature information systems and seek to improve the relationship between risk and capital.
3. SMA (Standardized Measurement Approach): True Risk Sensitivity and Operational Maturity
With Basel III and IV, the SMA was consolidated, replacing the previous approaches and establishing a more standardized and risk-sensitive framework.
The model combines two main components:
Business Indicator Component (BIC): measures the magnitude of the business by considering income, expenses, and profitability.
Internal Loss Multiplier (ILM): adjusts the requirement based on historical operational losses recorded in certified databases.
In other words, the SMA measures not only the size of the bank but also the quality of its operational risk management.
An institution with strong controls and low loss frequency can reduce its requirement, while one with deficiencies or insufficient traceability will see it increase.
Why it is the current standard:
Reflects the true exposure to operational risk.
Rewards sound management and data quality.
Facilitates international comparability and transparency before regulators.
Necessary conditions:
Complete and certified databases of operational loss events.
Accurate and audited financial information.
Robust and well-documented internal control processes.
The SMA is the natural evolution of the system: it transforms regulatory compliance into a strategic management tool.
The choice of model depends on the institution’s level of maturity and the requirements of its regulator. However, all institutions must demonstrate that the capital they maintain is aligned with their actual level of risk exposure.
Complying with Basel is not only a regulatory obligation; it is a responsible governance practice that:
Strengthens financial resilience.
Increases market and investor confidence.
Ensures international competitiveness.
The correct calculation of capital is, ultimately, a reflection of the transparency and discipline of risk management within each organization.
Properly implementing the Basel models involves managing large volumes of accounting and operational data, ensuring the traceability of events, and meeting certification and audit requirements.
Pirani simplifies this process through its Capital Requirement module, which enables institutions to calculate and manage the required capital under the three approaches —BIA, TSA, and SMA— in an automated, auditable, and internationally compliant manner.
The system integrates accounting data, risk events, and regulatory parameters, ensuring accurate, traceable results that are ready for regulatory reporting.
In this way, institutions not only comply with Basel but also transform operational risk management into a strategic factor for financial stability.
Discover how our module works in the Help Center.
Try it now and optimize your management!
Don’t have the capital requirement module yet?
Schedule a demo with our sales team!