A Capital Measure 

 is a Scarce Resource 

Retrograding AMA to SMA

 New Directives ... 

This page has been dedicated to investigate various aspects of the new Standard Measurement Approach (SMA) for banks operational risk capital charge.

 

The new SMA method that has been published by the Basel Committee on Banking Supervision was showcased over twelve months ago. However, there is a new consultative document that threatens to unearth current trends in parametric operational risk measurement.

 

Over the next few months, we hope to add to this page to give insight into this new SMA technique, demonstrating how can work, its strengths and its weaknesses.  We will reference popular articles and hopefully research a few of our own.

Consultation Document

 Commenting to BIS 

 What they are saying ... 

 From the blog ... 

Way back in 2014 the new methods for a redesign Standarized Approach for measuring Operational Risk capital emerged. No one would expect that AMA was under threat but a year or so on, we are in a very different place. If you want to really understand the calculation under SMA, this is a good article to read.

Recently the world was amazed by the instruments , built by scientists searching for Einstein's gravity waves,  which measured changes in the length of a 4 kilometer long bar to 1/10,000 the width of a proton.  By contrast, the Basel Committee of the Bank for International Settlements (BCBS) has appeared to resort to the age-old practice of examining chicken entrails to divine the future.

 

Pat clearly outlines three reasons why the new SMA is a fail in this wonderfully insightful text.

 

In its proposal to replace the Advanced Measurement Approach (AMA) with a simpler Standardised Measurement Approach (SMA), the Basel Committee on Banking Standards (BCBS) bemoaned that fact that, on the AMA, the Committee’s “expectations failed to materialise” and as one expert noted in a child-like tantrum, threw the ” toys out of the pram”.

 

Another wonderful article that looks at the history of operational risk in the Basel domain and why the BCBS have failed.

The much awaited consultative document on the future of AMA and the Operational Risk Regulatory Capital was published on 4th March 2016. And the initial reactions, going by the newspaper headlines and online commentary is, understandably, one of shock and aghast.

 

Ravi Gupta highlights four major issues with the new SMA technique.

 

A recent paper (in a series) published by Azamat Abdymomunov and Ibrahim Ergen of the Federal Reserve Board of Richmond, titled “Correlations and Systemic Risk in Operational Losses of the U.S. Banking Industry”. Since Operational Risk has been shown to have a systemic component, in addition to a firm-specific (idiosyncratic) component, a thorough review of the capital regime for Operational Risk is called for.

PWC publishes a first take and notes banks with a loss history above or below the industry average will have capital above or below the BI component, respectively. Additionally, the ILM weighs tail events (i.e., large events above 10m euro) heavier than others – an indication that regulators believe that banks should carry a larger capital penalty for particularly high past losses.

The inherent complexity of the AMA and the lack of comparability arising from a wide range of internal modelling practices have exacerbated variability in risk-weighted asset calculations.

Is it really a good idea to remove the AMA and have the same SMA for each institute? Do we not increase the Model Risk in the whole system? In my opinion it was a good idea to have incentives to think about the individual risk profile of an institution.

 

 

 

 

 

 

 

 

 

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October 8, 2015

Overall I am a fan of Risk.Net and I find their articles, as well as their publications not only interesting but relatively comprehensive, definitely leading when it comes to news in the risk management domain. I like it.

After seeing the article titled “Basel Committee Faces hard choices in op risk modelling reform” a while back, it didn’t really surprise me. This does reflect where operational risk practices have kind of...

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