Explanation

Under the Basel Committee's proposals for the Advanced Measurement Approach (AMA) for operational risk capital calculation:

• Confidence Level: 99.9% confidence level is required
• Time Horizon: 1-year time horizon is used

This means banks must hold enough capital to cover operational risk losses with 99.9% confidence over a one-year period. The 99.9% confidence level is significantly higher than the 99% level used in some other risk measures, reflecting the need for substantial capital buffers against operational risk events.

Key Points:

• 99.9% confidence level ensures banks can withstand extreme operational loss events
• 1-year time horizon aligns with typical capital planning cycles
• This requirement applies specifically to banks using the Advanced Measurement Approach
• The high confidence level accounts for the tail risk in operational loss distributions