A Note on the Standard Measurement Approach versus the Loss Distribution Approach–Advanced Measurement Approach: The Dawning of a New Regulation

19 Pages Posted: 19 Oct 2017

See all articles by Andrés Mora-Valencia

Andrés Mora-Valencia

Universidad de los Andes, Colombia - School of Management

Date Written: October 19, 2017

Abstract

A recent Basel Committee on Banking Supervision publication suggesting a switch from the advanced measurement approach (AMA) to the standard measurement approach (SMA) has generated debate in the financial industry and among academics regarding the new rules. This note presents a nonexhaustive review of the literature on operational risk quantification under a combination of the loss distribution approach model – the most commonly used of the AMA models – and extreme value theory. The literature review points out that Bayesian inference has provided solutions to different problems when modeling operational data. The main comments prepared by the financial industry in response to the new proposal and two recently published papers that analyze the impact of SMA are also summarized. Finally, the discussion section proposes an alternative solution – a single-loss approximation model (taking into account several severity and frequency distributions) with an appropriate risk measure under a Bayesian model averaging setting – as an intermediate solution to estimate operational risk capital. Its application will be the focus of future research.

Keywords: Advanced Measurement Approach (AMA), Loss Distribution Approach (LDA), Standardized Measurement Approach (SMA), Bayesian Methods

Suggested Citation

Mora-Valencia, Andrés, A Note on the Standard Measurement Approach versus the Loss Distribution Approach–Advanced Measurement Approach: The Dawning of a New Regulation (October 19, 2017). Journal of Operational Risk, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3055651

Andrés Mora-Valencia (Contact Author)

Universidad de los Andes, Colombia - School of Management ( email )

Carrera Primera # 18A-12
Bogotá
Colombia

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