loss resulting from inadequate or failed internal processes, people and systems or from external events ” risk. this definition includes legal risk, but excludes strategic and reputational risk. three approaches underlie measurement of capital against operational risk : ( i ) basic indicator approach ( bia ) – capital for operational risk should be equal to the average over the previous three years of a fixed percentage ( denoted alpha = 15 % ) of positive annual gross income, ( ii ) standardized approach capital charge for each business line is calculated by multiplying gross income by a factor ( denoted beta ) assigned to that business line. beta ( ranging between 12 - 18 % ) serves as a proxy for the industry - wide relationship between the operational risk loss experience for a given business line and the aggregate level of gross income for that business line ; and ( iii ) advanced measurement approach - the regulatory capital requirement will equal the risk measure generated by the bank ’ s internal operational risk measurement system using the quantitative and qualitative criteria for the ama. overall the approaches for operational risk assessment are not as nuanced as for credit risk, however the ama approach does allow for more fine tuning. once again the banks with better risk assessment would opt for the advance approaches. market discipline pillar underscores need for transparency and disclosure of data and technicalities. the evaluation of banks ’ risks and its systems and capital adequacy by the market will help ensure integrity and validation of other pillars. for this pillar to work, it needs to be supported by proper accounting rules and more elaborate disclosure of bank ’ s strategies and approaches adopted, risk profile and capital strategy through economic and credit cycle, information of the stress tests, and pd / lgd data. fourth, within the pillars, the accord offers a range of options and incentivizes banks to move from vanilla sa which assigns high risk weights and capital standards to adopting irb and within it further having the option to choose either the foundation versus advanced irb. these options have clear trade offs but most importantly, irb offers greater capital relief relative to sa. nevertheless, irb systems will only be feasible if they are supported by databases and history on credit losses, rating models and risk management systems etc. and their soundness and integrity has been validated by supervisors. banks operating in less developed countries, having limited in - house expertise, and small to medium size are in general opting for sa. the advantage of sa is its relative ease of implementation by even small and

. data is also needed to track the terms of transactions, including maturity and haircuts. one interesting idea is for regulators to run exercises in which they ask prime brokers to calculate portfolio haircuts against archetypal leveraged portfolios. the aims would be both to track any loosening in market - wide standards over time and to spot outlier dealers that require lower haircuts than their competitors. these significant regulatory reforms will have consequences for the behaviour of dealers and investors in securities financing markets. some market participants may seek ways around the new regulations : for example, there has been talking about dealers “ renting ” balance sheet from other market participants or establishing off - balance sheet financing vehicles. the flipsides of more resilient dealers and markets in periods of stress may well be less leverage, less maturity transformation and lower dealer inventories in more normal periods. the balance is not easy to strike ; we may need to readjust our approach as we learn. but the goal of these reforms is clear : to make securities financing markets resilient. robust securities financing markets should help to stabilise rather than destabilise the financial system in the face of shocks. the reduction in dealer inventories has attracted a lot of comment, with questions about whether they will be willing and able to provide liquidity as market makers in falling markets on the same scale as in the past. but the role of dealers in providing stable financing to leveraged investors may be equally important. those investors may be the most likely to see a market crash as a buying opportunity – but only if they are not over - leveraged and have access to borrowing from financially - sound dealers. put another http : / / www. bis. org / publ / bcbs270. pdf. http : / / www. bis. org / bcbs / publ / d295. pdf. http : / / www. bis. org / publ / bcbs238. pdf. in october 2014, the fsb published strengthening oversight and regulation of shadow banking : regulatory framework for haircuts on non - centrally cleared securities financing transactions ( http : / / www. financialstability board. org / publications / r _ 141013a. pdf ). bis central bankers ’ speeches way, we want dealers and leveraged investors to be providers not demanders of liquidity in a crisis. references gorton, g b, metrick, a, & xie,