Comments on the Basel Committee on Banking Supervision proposal for a new standardized approach for operational risk

Giulio Mignola, Roberto Ugoccioni and Eric Cope

Journal of Operational Risk

Abstract: ABSTRACT On March 4, 2016, the Basel Committee on Banking Supervision published a consultative document in which a new methodology, the standardized measurement approach;(SMA), was introduced for computing operational risk regulatory capital for banks. In this paper, the behavior of the SMA is studied under a variety of hypothetical and;realistic conditions, showing that the simplicity of the new approach is very costly in some ways. We find that the SMA does not respond appropriately to changes in the;risk profile of a bank, and it is incapable of differentiating among the range of possible risk profiles across banks.We also discover that SMA capital results generally appear to be more variable across banks than the previous advanced measurement approach (AMA) option of fitting the loss data, and that the SMA can result in banks over- or under-insuring against operational risks relative to previous AMA standards. Finally, we argue that the SMA is retrograde in terms of its capability to measure risk and, perhaps more importantly, fails to create any link between;management actions and capital requirement.

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