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

See all articles by Gareth Peters

Gareth Peters

Department of Actuarial Mathematics and Statistics, Heriot-Watt University; University College London - Department of Statistical Science; University of Oxford - Oxford-Man Institute of Quantitative Finance; London School of Economics & Political Science (LSE) - Systemic Risk Centre; University of New South Wales (UNSW) - Faculty of Science

Pavel V. Shevchenko

Macquarie University; Macquarie University, Macquarie Business School

Bertrand Hassani

Université Paris I Panthéon-Sorbonne; University College London - Department of Computer Science

Ariane Chapelle

University College London - Department of Computer Science

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2016

Abstract

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

Peters, Gareth and Shevchenko, Pavel V. and Hassani, Bertrand and Chapelle, Ariane, Should the Advanced Measurement Approach be Replaced with the Standardized Measurement Approach for Operational Risk? (July 1, 2016). Journal of Operational Risk, Vol 11, No. 3, pp. 1–49, 2016, DOI: 10.21314/JOP.2016.177, Available at SSRN: https://ssrn.com/abstract=2788920 or http://dx.doi.org/10.2139/ssrn.2788920

Gareth Peters (Contact Author)

Department of Actuarial Mathematics and Statistics, Heriot-Watt University ( email )

Edinburgh Campus
Edinburgh, EH14 4AS
United Kingdom

HOME PAGE: http://garethpeters78.wixsite.com/garethwpeters

University College London - Department of Statistical Science ( email )

1-19 Torrington Place
London, WC1 7HB
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

University of Oxford Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

London School of Economics & Political Science (LSE) - Systemic Risk Centre ( email )

Houghton St
London
United Kingdom

University of New South Wales (UNSW) - Faculty of Science ( email )

Australia

Pavel V. Shevchenko

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

HOME PAGE: http://www.businessandeconomics.mq.edu.au/contact_the_faculty/all_fbe_staff/pavel_shevchenko

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Bertrand Hassani

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

University College London - Department of Computer Science ( email )

United Kingdom

Ariane Chapelle

University College London - Department of Computer Science ( email )

Gower Street
London, WC1E 6BT
United Kingdom
+44(0)7833453854 (Phone)

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