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

Gareth W. Peters (), Pavel V. Shevchenko (), Bertrand K. Hassani () and Ariane Chapelle ()
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Gareth W. Peters: Department of Statistical Sciences - University College London UK
Pavel V. Shevchenko: CSIRO Australia
Bertrand K. Hassani: Centre d'Economie de la Sorbonne, Grupo Santander, https://centredeconomiesorbonne.univ-paris1.fr
Ariane Chapelle: Department of Computer Science - University College London UK

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: Recently, Basel Committee for Basel Committee for Banking Supervision proposed to replace all approaches, including Advanced Measurement Approach (AMA), for operational risk capital with a simple formula referred to as the Standardised Measurement Approach (SMA). This paper discusses and studies the weaknesses and pitfalls of SMA such as instability, risk insensitivity, super-additivity and the implicit relationship between SMA capital model and systemic risk in the banking sector. We also discuss the issues with 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 internal modelling 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, UK and USA, and recently at OpRisk Europe 2016 conference in London

Keywords: operational risk; standardized measurement approach; loss distribution approach; advanced measurement approach; Basel Committee for Banking Supervision regulations (search for similar items in EconPapers)
JEL-codes: C18 G21 G28 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2016-07
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:16065

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