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.
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For example, a framework that required the same risk weights for treasury bonds and junk bonds would be ignoring real differences in risk. Similarly, simple models that assume linearity, stationarity, or normality can perform much worse than more complex models that relax these assumptions when these assumptions are not accurate.
The empirical bootstrap is a simplified LDA model where the historical loss severity distribution is used as the severity distribution, instead of the common approach of using a parametric severity distribution.
If losses from exited businesses are completely excluded upon exit but losses from an entered businesses are only introduced slowly as they accrue, LDA models are likely to be downward biased.
Units of measure are the modeling units to which the LDA is applied in estimating operational loss exposure.
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Migueis, M. Evaluating the AMA and the new standardized approach for operational risk capital. J Bank Regul 20, 302–311 (2019). https://doi.org/10.1057/s41261-019-00095-z
- Banking regulation
- Basel standards
- Regulatory capital
- Operational risk
- Internal models
- Standardized approaches