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Causal Capital ~ The Knowledge Capital Specialists

Skipping SMA

Saturday, December 8, 2018

One of my pet topics in Risk Management is Operational Risk in a Banking Context !!!

 

 

Patrick McConnell "Guan, very good point. Basel is lost on Operational Risk - new SMA is a disgrace"


Patrick is so spot on, SMA is a disgrace for at least three reasons. Firstly and foremost it is a proxy measure of risk and consequently up for manipulation, notwithstanding it isn't a coherent measure of risk and at best a weak attempt to price risk or develop an industry-wide benchmark. Secondly, it was shoved down the throat of the global banking community without proper consultation and finally, it threatens to undo all the good work in operational risk that has been carried out in banking since Basel II was introduced. The community of risk managers has written plenty about the curse of SMA [LINK].

 

Save the AMA Whale | Philippos Papadopoulos [LINK]

 

Philippos is right too, AMA is a whale, it is by no means satisfactory BUT cancelling the best part of a decade of research that risk managers have pulled together for the sake of politics, is evil and so it is with the BCBS. Shame on them !!!

 

Guan, in the advent of the digital age, AMA would benefit greatly from the explosion of data and here is the crazy thing with it all. The good banks, the good regulators are doing something about this. If the Bank for International Settlements wanted a consistent measure of risk across the industry with their Simple Measurement Approach (name modified intentionally), they have created a situation that is far from that, that is the irony in the whole debate.

 

Today a bank's operational risk maturity can be assessed as being compliant if it follows SMA but alas immature all the same. One needs to move into a space left open by AMA, correcting its problems to progress the op risk management discipline forwards.

 

There are rumblings across the operational risk banking community to make a difference and here is a great initiative being setup by the Central Bank of Kuwait.

 

Central Bank of Kuwait launches into AI [LINK]

 

In the coming months ahead, Causal Capital is going to be working with several banks across Asia, Australia and the GCC to help them mature their analytics in the operational risk domain. Tomorrow we are hosting an Op Risk Analytics event in Kuwait focusing directly on this subject matter.

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