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FRM Part I · FRM Exam Part I · Operational Risk

Why did the Basel Committee withdraw the advanced measurement approach (AMA) in the revised operational risk framework?

The Basel Committee withdrew the AMA because internal models produced widely varying capital figures for similar banks, were complex, and reduced comparability across institutions. It replaced them with a single, simpler standardised approach combining a business indicator measure with the bank's own loss history.

  1. ABanks' internal models produced excessive variability in capital and were complex and hard to compareCorrect
  2. BAMA models always produced higher capital than the standardised approach
  3. CAMA could not incorporate internal loss data
  4. DRegulators wanted to remove all operational risk capital for large banks

Explanation

The Committee found that AMA outputs varied widely across banks with similar risk profiles, lacked comparability and were complex. It did not reflect an inability to use loss data, nor a removal of capital.

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