Between Policy and Practice: Basel III Operational Risk Implementation in Peshawar's Commercial Bank Branches

Abstract

This study explores the awareness of Basel III operational risk requirements and operational risk control practices of commercial banks at branch level and implementation selection at the institution level in Peshawar city of Pakistan. The study has a descriptive, mixed-methods design that triangulates the findings from semi-structured interviews with ten bank branch/operations managers against the published annual reports and disclosures of the corresponding banks, and examines three interrelated questions: how much do bank branch-level staff know about Basel III operational risk requirements; what operational risk controls are actually followed at branch level; and which approach to capital-measurement for operational risk does each bank take. The interviews show that Basel III was poorly understood with only 2 out of 10 respondents being able to accurately explain Basel III operational risk requirements; the rest of the respondents explained their actions as compliance with internal bank policies, rather than to Basel III. Institutional level, the annual report disclosures indicate that 10 of 10 sample banks have implemented a Basel III framework for measuring capital adequacy and market risk, with 5 of 10 banks continuing to use the Basic Indicator Approach (BIA) for measuring operational risk instead of the more risk-sensitive Alternative Standardized Approach (ASA), and 2 banks reporting Basel III applicability without full implementation. In spite of this lack of regulatory knowledge, the operational controls actually employed at the branch level are very similar to the sound principles of operational risk management set out by the Basel Committee on Banking Supervision (BCBS, 2014). Basel-specific training was also found to be very limited, with awareness about Basel being created by the operating procedures issued by the branch managers, which are aligned with the Basel principles, instead of through the Basel literacy programmes. The study suggests that this trend is a reflection of a disconnect between operational compliance and regulatory literacy and offers guidance to supervisors and banks in emerging markets in designing operational risk training and communicating regulatory frameworks to the branch level.

Keywords: Alternative Standardized Approach; bank branch management; Basel III; Basic Indicator Approach; operational risk; Pakistan; Peshawar; regulatory awareness