Journal of Operational Risk

Risk.net

Should the advanced measurement approach be replaced with the standardized measurement approach for operational risk?

Gareth W. Peters, Pavel V. Shevchenko, Bertrand Hassani and Ariane Chapelle

  • SMA operational risk capital is less responsive to risk drivers and unstable
  • SMA may induce more risk taking and can produce super-additive capital
  • AMA should not be discarded but improved by standardization

ABSTRACT

Recently, the Basel Committee for Banking Supervision proposed to replace all approaches, including the advanced measurement approach (AMA), to operational risk capital with a simple formula referred to as the standardized measurement approach (SMA). This paper discusses and studies the weaknesses and pitfalls of the SMA, such as instability, risk insensitivity, super-additivity and the implicit relationship between the SMA capital model and systemic risk in the banking sector. We also discuss issues with the 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 the internal modeling 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, the United Kingdom and the United States, and recently at the OpRisk Europe 2016 conference in London.

 

 

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an indvidual account here: