Australia suggests new guidance for AMA for operational risk

The revised approach for the Australian banking system’s Advanced Measurement Approaches (AMA) for operational risk was released today by the country’s regulator. The Australian Prudential Regulatory Authority’s (Apra) guidance has been updated in the draft prudential standard and prudential practice guide (PPG).

Australia Prudential Standard (APS) 115 reflects industry suggestions made for the operational risk regulatory capital calculation methodology.

The revised guidance states that any measurement system must be able to allocate economic capital for operational risk to internal business lines and be consistent across the entire institution.

It also must contain incentives to improve risk management and be understood from the board down. “Each business line must be able to clearly articulate the drivers of its operational risk profile and demonstrate how it utilises the outputs of the operational risk measurement system to supplement its day-to-day management processes,” states the guidance.

Industry also submitted a number of comments over the corporate governance and risk management criteria surrounding an internal modelling approach.

Taking industry comments on board, the new guidance states that the firm’s internal modelling approach must be “conceptually sound, comprehensive, consistently implemented, transparent and capable of independent review and validation.”

Additionally, “the Authorised Deposit-taking Institution’s (ADI) operational risk measurement system must be sufficiently comprehensive to capture all material sources of operational risk across the ADI, including those events that can lead to rare and severe operational risk losses.”

Australia is scheduled to finalise all of the prudential standards required for Basel II in the first half of 2007 with a view to implementing Basel II on January 1, 2008.
Apra is seeking comments on the new draft until November 30. Click here to see the proposed guidance on Apra’s website.

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