Evaluating the AMA and the new standardized approach for operational risk capital
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.
KeywordsBanking regulation Basel standards Regulatory capital Operational risk Internal models Standardized approaches
JEL ClassificationG21 G28 G32
- 1.Basel Committee on Banking Supervision. 2017. Basel III: Finalizing Post-Crisis Reforms. Basel: Bank for International Settlements.Google Scholar
- 2.Basel Committee on Banking Supervision. 2012. Core Principles on Effective Banking Supervision. Basel: Bank for International Settlements.Google Scholar
- 4.Hoenig, T. 2015. Post-crisis risks and bank equity capital. Speech to the 18th Annual International Banking Conference at the Federal Reserve Bank of Chicago. Chicago, IL, USA, 5 November 2015.Google Scholar
- 5.Tarullo, D. 2016 Financial Regulation Since the Crisis. Speech to Federal Reserve Bank of Cleveland and Office of Financial Research 2016 Financial Stability Conference. Washington, DC, USA, 2 December 2016.Google Scholar
- 6.Federal Reserve Bank of Minneapolis. 2017. The Minneapolis Plan to End Too Big to Fail. Minneapolis: Federal Reserve Bank of Minneapolis.Google Scholar
- 7.Firestone, S., A. Lorenc, and B. Ranish. 2017. An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the US. Finance and Economics Discussion Series 2017-034. Washington: Board of Governors of the Federal Reserve System.Google Scholar
- 10.Elliott, D. 2013. Higher Bank Capital Requirements Would Come at a Price. Washington: Brookings Institute.Google Scholar
- 11.Dimon, J. 2017. Letter to Shareholders. New York: JP Morgan Chase.Google Scholar
- 13.International Monetary Fund. 2014. How Big is the Implicit Subsidy for Banks Considered Too Important to Fail? Global Financial Stability Report April 2014. Washington: International Monetary Fund.Google Scholar
- 18.Basel Committee on Banking Supervision. 2013. The Regulatory Framework: Balancing Risk Sensitivity, Simplicity and Comparability. Basel: Bank for International Settlements.Google Scholar
- 21.Aikman, D., M. Galesic, G. Gigerenzer, S. Kapadia, K. Katsikopoulos, E. Murphy, and T. Neumann. 2014. Taking Uncertainty Seriously: Simplicity Versus Complexity in Financial Regulation. Financial Stability Paper No. 28. London: Bank of England.Google Scholar
- 24.Basel Committee on Banking Supervision. 2006. International Convergence of Capital Measurement and Capital Standards. A Revised Framework. Basel: Bank of International Settlements.Google Scholar
- 25.Department of the Treasury, Federal Reserve System, and Federal Deposit Insurance Corporation. 2007. Risk-Based Capital Standards: Advanced Capital Adequacy Framework. Washington: Basel II.Google Scholar
- 26.Tarullo, D. 2012. Statement by Governor Daniel K. Tarullo. Washington: Board of Governors of the Federal Reserve System.Google Scholar
- 27.Hoenig, T. 2013. Basel III Capital: A Well-Intended Illusion. Speech to the International Association of Deposit Insurers 2013 Research Conference. Basel, Switzerland, April 9, 2013.Google Scholar
- 28.American Bankers Association. 2016. Comment letter on the Standardized Measurement Approach. https://www.bis.org/bcbs/publ/comments/d355/amba.pdf. Accessed 9 January 2019.
- 29.The Clearing House, The Securities Industry and Financial Markets Association, and Financial Services Roundtable. 2016. Comment letter on the Standardized Measurement Approach. https://www.bis.org/bcbs/publ/comments/d355/theclearinghous.pdf. Accessed 9 January 2019.
- 30.The Risk Management Association. 2016. RMA/AMAG Comment Letter on SMA. https://www.bis.org/bcbs/publ/comments/d355/rmaamag.pdf. Accessed 9 January 2019.
- 31.Curti, F., Ergen, I., Le, M., Migueis, M., and Stewart, R. 2016. Benchmarking Operational Risk Models. Washington, DC, USA: Board of Governors of the Federal Reserve System. Finance and Economics Discussions Series 2016-070.Google Scholar
- 33.Tarullo, D. 2008. Banking on Basel: The Future of International Financial Regulation. Washington: Peterson Institute for International Economics.Google Scholar
- 34.Hoenig, T., and T. Morris. 2013. Restructuring the Banking System to Improve Safety and Soundness in The Social Value of the Financial Sector: Too Big to Fail or Just Too Big. Hackensack: World Scientific Publishing Co.Google Scholar
- 35.Plosser, M., and J. Santos. 2014. Banks’ Incentives and the Quality of Internal Risk Models. Staff Report No. 704. New York: Federal Reserve Bank of New York.Google Scholar
- 42.Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervisions. 2011. Interagency Guidance on the Advanced Measurement Approaches for Operational Risk, Washington, DC, USA.Google Scholar
- 43.Board of Governors of the Federal Reserve System. 2014. Supervisory Guidance for Data, Modeling, and Model Risk Management Under the Operational Risk Advanced Measurement Approaches. Washington, DC, USA: Board of Governors of the Federal Reserve System. Basel Coordination Committee Bulletin 14-1.Google Scholar
- 44.European Banking Authority. 2015. Regulatory Technical Standards on Assessment Methodologies for Use of AMAs for Operational Risk. London: European Banking Authority.Google Scholar
- 45.Meek, J. 2014. Scenarios fill the speculative gaps, op risk panel says. Risk.net. https://www.risk.net/risk-management/operational-risk/2350885/scenarios-fill-speculative-gaps-op-risk-panel-says. Accessed 9 January 2019.
- 47.Marlin, S. 2016. European Banks Face Steep op Risk Capital Hike from SMA. Risk.net. http://www.risk.net/risk-management/operational-risk/2453958/european-banks-face-steep-op-risk-capital-hike-from-sma. Accessed 9 January 2019.
- 48.Operational Riskdata eXchange Association. 2016. ORX Response: The Standardized Measurement Approach. https://www.bis.org/bcbs/publ/comments/d355/orx.pdf. Accessed 9 January 2019.
- 50.Basel Committee on Banking Supervision. 2016. Standardized Measurement Approach for Operational Risk. Basel: Bank for International Settlements.Google Scholar
- 51.Chapelle, A., Hassani, B., Peters, G., Sekeris, E., and Shevchenko, P. 2016. Discarding the AMA Could Become a Source of Op Risk. Risk.net. http://www.risk.net/risk-management/operational-risk/2451089/discarding-the-ama-could-become-a-source-of-op-risk. Accessed 9 January 2019.
- 52.Basel Committee on Banking Supervision. 2017. Basel III Monitoring Report. Basel: Bank of International Settlements.Google Scholar
- 53.Department of Justice. 2014. Bank of America to Pay $16.65 Billion in Historic Justice Department Settlement for Financial Fraud Leading up to and During the Financial Crisis. https://www.justice.gov/opa/pr/bank-america-pay-1665-billion-historic-justice-department-settlement-financial-fraud-leading. Accessed 9 January 2019.
- 54.Department of Justice. 2013. Justice Department, Federal and State Partners Secure Record $13 Billion Global Settlement with JPMorgan for Misleading Investors About Securities Containing Toxic Mortgages. https://www.justice.gov/opa/pr/justice-department-federal-and-state-partners-secure-record-13-billion-global-settlement. Accessed 9 January 2019.
- 55.British Bankers’ Association. 2016. Comment Letter on the Standardized Measurement Approach. https://www.bis.org/bcbs/publ/comments/d355/bba.pdf. Accessed 9 January 2019.
- 56.European Banking Federation. 2016. Comment Letter on the Standardized Measurement Approach. https://www.bis.org/bcbs/publ/comments/d355/ebf.pdf. Accessed 9 January 2019.
- 59.Curti, F., and M. Migueis. 2017. Predicting Operational Loss Exposure Using Past Losses. Rochester: SSRN.Google Scholar