Discarding the AMA Could Become a Source of OpRisk

Ariane Chapelle, Bertrand Hassani, Gareth W Peters, Evan Sekeris and Pavel Shevchenko

On March 3, the Basel Committee on Banking Supervision published a long-awaited consultative document on its new standardised measurement approach (SMA) to operational risk. In light of well-documented problems with the advanced measurement approach (AMA), the Basel Committee proposes some radical and ill-conceived reforms. It would replace the AMA – the own-models approach to operational risk used by more sophisticated banks – with a simplistic metric for regulatory capital.

Broadly, that metric would comprise a percentage of operating revenues that increases with the size of the bank, alongside a capital penalty for institutions that have reported higher op risk losses than the industry average over the last 10 years. (This increase with the size of the bank is in fact quite sharp, at 11% for small banks and 29% for the largest ones.)

In our opinion, this proposal is utterly flawed and should be unreservedly rejected. Rather than eliminating internal modelling for op risk capital, the committee should focus on standardising op risk quantification practices. The committee’s goal of industry-wide standardisation of op risk modelling – akin to what exists for other risks, such