Basel's Standardized Measurement Approach for operational risk

March 2016

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Overview

On March 4th, the Basel Committee introduced the Standardized Measurement Approach (SMA) for calculating operational risk capital. The SMA would not only replace the existing standardized approaches, but also the Advanced Measurement Approach (AMA). Under the SMA, regulatory capital levels will be determined using a simple method to facilitate comparability across the industry. However, by removing the AMA, banks will no longer be able to influence their capital requirements through modeling techniques, which may result in upward pressure on operational risk capital levels.

  1. The removal of the AMA is not unexpected.
  2. The SMA is consistent with regulators’ desire for simplification and increased comparability.
  3. The Business Indicator has been refined based on criticism from the last proposal.
  4. The Internal Loss Multiplier links capital to an organization’s operational loss experience.
  5. The quality of internal loss data will remain a point of focus.
  6. Increased scrutiny on data quality may open the door for attestation requirements.
  7. The proposal doesn’t specify criteria for the exclusion of certain loss events.
  8. Banks have an opportunity to re-focus modeling resources toward more forward-looking analysis of risks.
  9. Operational risk management will continue to be as important as ever.
  10. The proposal is likely to see minor modifications.

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Alison Gilmore
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