06 · SMA — mechanics & the ILM question

Art 312–324 CRR

Purpose & history

An income statement, three coefficients

The SMA's design bets that operational risk scales with business volume, and that an income statement measures volume more honestly than any loss model. Each BI component is built to resist the obvious games: ILDC caps the interest margin at 2.25% of earning assets (else high-margin consumer lenders carry absurd op-risk capital); SC takes the max of income and expense (else outsourcing fees net away); FC takes absolute P&L (a loss-making trading year is not an op-risk holiday). The bucket coefficients are marginal, like income tax. Basel's ILM would then scale the result by loss history — the EU's ILM = 1 severs that link in Pillar 1, wagering that supervisors handle loss-sensitivity better through SREP than a formula handles it through a 10-year average. The wager is reviewable, and the EBA reports on it.

Requirements

BI mappingEach component tied to FINREP lines via the mapping ITS; divestment/acquisition adjustments with supervisory permission; three-year averages governed.

Loss register (BI ≥ €750m)≥ 10 years, ≥ €20k threshold, occurrence/discovery/accounting dates all captured; groupings of related events; boundary-with-credit classification documented.

ExclusionsSupervisory permission per excluded loss; divested-activity exclusions evidenced.

Disclosure & Pillar 2Annual loss disclosure; ICAAP still quantifies scenarios, conduct and ICT — DORA supplies the resilience layer capital no longer pretends to.

Calculations

BI component build II €3.0bn, IE €1.4bn, IEA €80bn: ILDC = min(1.6, 2.25%×80 = 1.8) = €1.6bn + dividends €0.1bn
OI €0.5 / OE €0.7 → max €0.7 · FI €1.2 / FE €0.4 → max €1.2 → SC = €1.9bn
|P&L_TB| €0.3 + |P&L_BB| €0.2 → FC = €0.5bn
BI = €4.1bn → BIC = 0.12×1 + 0.15×3.1 = €585m

The cap at work Consumer lender: II−IE = €2.4bn on IEA €60bn → uncapped ILDC would be 2.4; cap = 2.25% × 60 = €1.35bn — the cap, not the margin, sets the charge. Remove it and high-margin lending gains ~€130m of op-risk own funds from one line.

ILM = 1 vs Basel (from the section detail) €80m avg losses → LC = €1.2bn → Basel ILM ≈ 1.4 → ≈ €800m vs €570m EU. The gap is Pillar 2's problem now.

Changes & sources

Repealed	Replaced by
BIA (15% of gross income)	One SMA: BIC × ILM, ILM = 1 (Art 314(2))
TSA (12–18% by business line)
AMA (internal models)

Sources: Art 312–324; BI-mapping ITS; EBA GL on the loss data set; DORA alongside. Watch: the ILM review and the fate of loss-sensitivity in the EU.

Independent analysis by Elderlake Partners, as at August 2026. Not legal, accounting or supervisory advice.