How your organization can calculate Capital Requirements

Written by Risk Management School | 3 de December de 2025

In this class, Olga Torres, CTO at Pirani, will show you how to automate and strengthen this process. Will guide you through the essentials of calculating capital requirements and how automation through risk management software can make this process faster, more accurate, and far easier to manage.

What is Operational Risk Capital?

Operational Risk Capital:

Is the amount of financial resources a bank or financial institution must hold to absorb losses that come from failures in people, processes, systems, or external events.

Why Capital Requirements Matter for Companies

Key reasons:
1. Avoids insolvency during high-impact events.
2. Improves risk culture and operational discipline.
3. Supports long-term strategic decisions.
4. Strengthens regulatory compliance.
5. Enhances market credibility.

What Is the Basel Framework?

Key pillars:
● Pillar 1 – Minimum Capital Requirements
● Pillar 2 – Supervisory Review Process
● Pillar 3 – Market Discipline / Transparency

Basel Approaches for ORC

Approach	Full Name	How It Works (Simple Explanation)
BIA	Basic Indicator Approach	Uses gross income as a proxy for operational risk. Capital = 15% × 3-year average gross income.
TSA	Standardised Approach	Applies different percentage factors to income across business lines.
AMA	Advanced Measurement Approach	Uses internal models based on historical losses, scenarios, and internal controls.
SMA	Standardised Measurement Approach	Combines the Business Indicator Component (BIC) with the Internal Loss Multiplier (ILM). Capital = BIC × ILM.

Approach	Data Required	Pros	Cons
BIA	Only financial statements (gross income).	Simple, fast, very low effort.	Not risk-sensitive; income does not reflect operational risk.
TSA	Financial statements + business line allocation.	More risk-sensitive than BIA; structured.	Still income-based; weak link to real losses.
AMA	Large internal loss database, scenario analysis, internal models.	Highly risk-sensitive and tailored.	Very complex and costly
SMA	Financial statements + 10 years of operational loss data.	Balanced, transparent, globally adopted; rewards strong data quality.	Requires disciplined loss reporting and clean data.

SMA: The New Global Standard

Data Quality Requirements:

Complete data
Accurate data
Consistent data
Unique records

Process Requirements:

Formal written procedures
Organization-wide participation
Approval workflow
Segregation of duties

Technology Requirements:

System with full traceability
Security controls
Technical audit trail

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