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

Gareth Peters (), Pavel Shevchenko (), Bertrand Hassani () and Ariane Chapelle ()
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Gareth Peters: Department of Statistical Sciences - UCL - University College of London [London]
Pavel Shevchenko: CSIRO - Commonwealth Scientific and Industrial Research Organisation [Canberra]
Bertrand Hassani: CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Ariane Chapelle: Department of Computer Science - UCL - University College of London [London]

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

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: Basel Committee for Banking Supervision regulations; loss distribution approach; advanced measurement approach; operational risk; standardised measurement approach (search for similar items in EconPapers)
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Date: 2016-07
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01391091
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Published in Documents de travail du Centre d'Economie de la Sorbonne 2016.65 - ISSN : 1955-611X. 2016

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