Standardized Measurement Approach for Operational Risk: Pros and Cons

Abstract

This response has been put together by academics and in total independence of any corporate or individual interests. Our results are solely driven by scientific analysis and presented in the interest of the financial and business community, both the regulated entities and the regulators alike. The response addresses the Standardised Measurement Approach (SMA) proposed in the Basel Committee for Banking Supervision consultative document “Standardised Measurement Approach for operational risk” (issued in March 2016 for comments by 3 June 2016); and closely related Operational risk Capital-at-Risk (OpCar) model proposed in the Committee consultative document “Operational risk – revisions to the simpler approaches”, October 2014.

The structure of this response involves a collection of summary results and comments for studies performed on the proposed SMA model which include:

• Capital instability; • Capital sensitivity; • Reduction of risk responsivity and interpretability; • Incentivized risk taking; • Discarding key sources of Operational risk data; • Possibility of super additive capital under SMA.

The detailed analysis of these points is developed in the manuscript [Peters et al, 2016] SSRN: http://ssrn.com/abstract=2788920

The response then concludes with suggestions relating to maintaining the AMA internal model framework with standardization recommendations that could be considered to unify internal modelling of Operational risk.