Should the Advanced Measurement Approach be Replaced with the Standardized Measurement Approach for Operational Risk?
Journal of Operational Risk, Vol 11, No. 3, pp. 1–49, 2016, DOI: 10.21314/JOP.2016.177
38 Pages Posted: 14 Jun 2016 Last revised: 15 Sep 2016
Date Written: July 1, 2016
Recently, Basel Committee for Banking Supervision proposed to replace all approaches, including Advanced Measurement Approach (AMA), for operational risk capital with a simple formula referred to as the Standardised Measurement Approach (SMA). This paper discusses and studies the weaknesses and pitfalls of SMA such as instability, risk insensitivity, super-additivity and the implicit relationship between SMA capital model and systemic risk in the banking sector. We also discuss the issues with closely related operational risk Capital-at-Risk (OpCar) Basel Committee proposed model which is the precursor to the SMA. In conclusion, we advocate to maintain the AMA internal model framework and suggest as an alternative a number of standardization recommendations that could be considered to unify internal modelling of operational risk. The findings and views presented in this paper have been discussed with and supported by many OpRisk practitioners and academics in Australia, Europe, UK and USA, and recently at OpRisk Europe 2016 conference in London.
Keywords: Operational Risk, Standarised Measurement Approach, Advanced Measurement Approach
Suggested Citation: Suggested Citation