Standardized Measurement Approach for Operational Risk: Pros and Cons

18 Pages Posted: 4 Jun 2016

See all articles by Gareth Peters

Gareth Peters

University College London - Department of Statistical Science; University of California Santa Barbara; 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; Macquarie University - Department of Actuarial Studies and Business Analytics

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

Date Written: June 2, 2016

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.

Suggested Citation

Peters, Gareth and Peters, Gareth and Shevchenko, Pavel V. and Hassani, Bertrand and Chapelle, Ariane, Standardized Measurement Approach for Operational Risk: Pros and Cons (June 2, 2016). Available at SSRN: https://ssrn.com/abstract=2789006 or http://dx.doi.org/10.2139/ssrn.2789006

Gareth Peters (Contact Author)

University of California Santa Barbara ( email )

Santa Barbara, CA 93106
United States

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

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

Australia

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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