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FRM Part I · FRM Exam Part I · Operational Risk

Which statement best describes why Basel regulators replaced the Advanced Measurement Approach (AMA) with the revised standardised approach for operational risk?

Regulators withdrew the AMA because internally modelled capital figures varied too much across banks with similar risks, making them complex and hard to compare. The revised standardised approach is simpler and more consistent, while still reflecting a bank's own loss experience through the internal loss multiplier.

  1. AAMA models produced excessive variability in risk-weighted assets and were hard to compare across banksCorrect
  2. BAMA required banks to hold capital equal to 100% of gross income
  3. CAMA ignored internal loss data entirely
  4. DAMA could only be used by banks with no trading book

Explanation

Regulators found that internally modelled AMA outcomes varied widely between banks with similar risk profiles, reducing comparability and credibility. The new approach is simpler and uses a standardised formula while still reflecting loss history via the ILM. AMA did use internal loss data, so the other options are factually wrong.

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