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

University of California Santa Barbara; University of California, Santa Barbara

Pavel V. Shevchenko

Macquarie University - Department of Actuarial Studies and Business Analytics

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)

University of California Santa Barbara ( email )

Santa Barbara, CA 93106
United States

University of California, Santa Barbara ( email )

Pavel V. Shevchenko

Macquarie University - Department of Actuarial Studies and Business Analytics ( email )

Australia

HOME PAGE: http://www.mq.edu.au/research/centre-for-risk-analytics/pavel-shevchenko

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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