BIC: Standardizing capital requirements for operational risk
New EBA Framework goes live January 1, 2025
Key Insights
- Implementation timeline: Set for a Jan. 1st, 2025 implementation date, the European Banking Authority (EBA) will introduce the Business Indicator Component (BIC) to replace the existing approach to calculating operational risk. The EBA has released several draft documents explaining how BIC is calculated and its role in CRR3 and Pillar 3 reporting.
- Fundamental shift in operational risk management: While the draft standards are not yet finalized, BIC represents a significant shift in how the EU treats operational risk. Banks will need to handle large volumes of data to manage compliance while maintaining consistency across reports.
- Need for automated compliance solutions: Given the looming deadline, companies should consider centralized, automated solutions to streamline data management, perform risk calculations and maintain regulatory consistency.
The push for standardization under Basel III continues, bringing significant changes to how banks calculate capital requirements for operational risk. Against this backdrop, the European Banking Authority (EBA) is introducing a new approach that requires banks to standardize these calculations, promoting consistency across the industry. The Business Indicator Component (BIC) framework takes effect on Jan. 1, 2025, with the first reporting deadline on March 31, 2025.
What is the Business Indicator (BI)?
The Business Indicator, introduced under final Basel III reforms (aka Basel IV), measures an institution’s volume of business and serves as a proxy for operational risk. Derived from balance sheet data and income statements, the BI consists of three components:
- Interest, Lease and Dividend Component (ILDC)
- Services Component (SC)
- Financial Component (FC)
The BI is then used to construct the Business Indicator Component, which provides a single, standardized, non-model-based approach to calculating regulatory capital for operational risk. This replaces existing approaches under previous frameworks.
How is BIC used?
Under the new framework, capital requirements will be based on operational risk as measured by the BI. Additionally, the old EU template for operational risk reporting will be replaced by three new templates:
- EU OR 1: Captures operational risk losses.
- EU OR 2: Details business indicator components and subcomponents.
- EU OR 3: Covers operational risk own funds requirements and risk exposure amounts.
The new requirements are twofold: the BIC applies both to Pillar 3 disclosures and to the broader EU Banking Package. The EBA has worked to align these frameworks for consistency and ease of compliance, but banks still face the challenge of implementing a reporting solution that meets the revised operational risk framework while ensuring accuracy.
When do BIC requirements take effect?
As stated, the BIC framework goes live on Jan. 1, 2025, with the first reporting deadline set for March 31, 2025. Banks subject to CRD IV and CRR3 reporting requirements should take steps now to prepare for compliance.
In parallel with the consultation process, the EBA launched a Quantitative Impact Study (QIS) to assess the impact of these changes. The results of this study, along with public feedback, will help finalize the Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS). This means that while the broad framework is clear, institutions should stay alert for any refinements or additional guidance from the EBA.
Impact on data sourcing and compliance
The proposed requirements introduce major implications for financial institutions, particularly in how they source and process P&L data. These inputs are essential for calculating the Basel operational risk capital charge.
At the same time, firms must source the necessary data to calculate business indicators in line with EBA-defined FINREP reporting guidelines. This requires financial institutions to ensure that their operational risk capital charge calculations align with regulatory expectations while maintaining data accuracy and completeness.
Beyond data sourcing, banks must also address the technical and operational complexities of implementing the EBA’s revised framework. This includes adjusting internal processes, IT systems and reporting methodologies to align with the new BIC approach.
Moreover, the revised framework introduces stricter calculation methodologies and reporting requirements, making it imperative for institutions to adapt quickly. Key elements of the draft Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) outline include:
- Adjustments for business events and exclusions: The framework includes guidelines for adjusting the Business Indicator (BI) in response to key business events, such as mergers, acquisitions, and disposals. Additionally, it defines specific items and elements that must be excluded from the BI calculation.
- Updated technical standards for operational risk calculation: The EBA has introduced new technical standards for calculating operational risk under the BIC approach, replacing prior methodologies under CRR2.
- Revised COREP reporting templates: To support the implementation of the BIC framework, the EBA has developed new COREP reporting templates (C16.x series). These templates replace the previous operational risk reporting frameworks.
Additionally, the framework specifies how to map items from the BI to FINREP reporting cells, illustrating the expectation of consistency across FINREP and COREP.
Further challenges with BIC implementation
In implementing the BIC, banks must also adapt to new supervisory reporting and disclosure requirements introduced under CRR3. These requirements include the reporting of losses, business indicator components, own-funds requirements and risk exposure amounts, creating additional layers of potential complexity.
For institutions operating across multiple jurisdictions, regional differences in Basel capital management and reporting frameworks add another challenge. The EU’s CRR3 and the UK’s Basel 3.1, for instance, feature important variations that firms must navigate. Mitigating compliance across different regulatory environments will require careful coordination and adaptable reporting solutions.
Regardless of the complexities, these changes are not simply regulatory hurdles to overcome—they also present an opportunity for banks to enhance reporting efficiencies and improve operational risk management through automation.
By adopting an end-to-end compliance solution that automates form population in accordance with EBA rules, institutions can mitigate compliance risk and accelerate disclosure processes.
What steps can banks take to prepare?
Institutions under the scope of the new BIC requirements may benefit from a unified solution for risk and FinReg-related reporting. A comprehensive system should include a single operational-risk module that performs risk calculations in compliance with multiple regulatory frameworks, such as BCBS, EU/EBA, Malay BNM, UK PRA, and U.S. Basel III Endgame rules.
Moreover, having an out-of-the-box connector module that bridges in-source data from FINSTAT FINREP data points—as outlined in EBA publications—can significantly reduce implementation efforts and support consistency across regulatory requirements. Transparency tools and visualization capabilities can further enhance accuracy by harmonizing data across reporting obligations.
Any solution should also be flexible enough to accommodate future adjustments to operational risk calculations or reporting processes as directed by the EBA. With these capabilities, institutions can help manage compliance while reducing operational risk.
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