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

Published on Sep 1, 2016in Journal of Operational Risk 0.73
· DOI :10.21314/JOP.2016.184
Giulio Mignola3
Estimated H-index: 3
(Intesa Sanpaolo),
Roberto Ugoccioni3
Estimated H-index: 3
(Intesa Sanpaolo),
Eric Cope1
Estimated H-index: 1
(Credit Suisse)
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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  • Citations (2)
Cited By2
Xiaoqian Zhu7
Estimated H-index: 7
(CAS: Chinese Academy of Sciences),
Jianping LiXiaolei19
Estimated H-index: 19
(CAS: Chinese Academy of Sciences),
Dengsheng Wu10
Estimated H-index: 10
(CAS: Chinese Academy of Sciences)
The Basel Committee on Banking Supervision (BCBS) states that in addition to the fact that it lacks simplicity, the Advanced Measurement Approach (AMA) must be discarded because the flexibility of ...
Published on Feb 8, 2019in Journal of Banking Regulation
Seven desirable properties for a capital framework are proposed, and the advanced measurement approach (AMA) and the new standardized approach (NSA) for operational risk capital are evaluated relative to them. The AMA is vulnerable to gaming, complex, and lacks comparability. The NSA lacks risk sensitivity and is unlikely to be appropriately conservative for US banks.