AMA: An Advanced Approach to Risk Measurement

Sergio Scandizzo

This chapter is primarily about how the advanced measurement approach (AMA) works in practice, how its application has developed since the first draft of the Second Basel Accord and how it has become a fairly robust mix of statistical, quantitative and qualitative measurement techniques. But this chapter is also about AMA as an approach to risk modelling; an approach that is not based solely on the statistical analysis of historical data, which in the author’s view would be an enormous benefit to the post-crisis risk-management profession if applied more broadly than just in operational risk.

As we have previously discussed in this Executive Report, even though it will be difficult to look at risk measurement in the future with the same confidence the industry used to show, this is not necessarily bad news for operational risk managers. We have been aware (and constantly reminded) of such shortcomings from the very beginning of our careers. There are a number of reasons for this peculiar condition of the profession and the author will mention the key ones hereafter.

Operational risk managers are more removed from the specific products within a company and, hence, less blinded