Salud

Introduced in 2008, the advanced measurement approach is more sophisticated475 _{than the basic indicator approach and the standardised} approach or even the alternative standardised approach.

473

i.e. Corporate finance; Trading and sales; Payment and settlement; Agency services; Asset Management services and Retail brokerage.

474

Although it is unlikely any of the respondent banks have adopted this method (perhaps with the exception of subsidiaries of global banks and/or Pan-African banks), it is suggested that this approach still merits a discussion as a future adoption cannot be completely ruled out as banks get bigger and more sophisticated and continue to improve their risk management strategies and frameworks.

The rationale for its introduction was to provide banks with a much wider scope to develop and implement their own unique models in the assessment of operational risks. Linked to this rationale was the desire by the BCBS to allow banks operating the advanced measurement approach set aside capital which was characteristically low, thus providing on average a reflection of the low level of operational risk such banks had been exposed to.

Contrastingly, Moosa Imad, suggests that banks using the advanced measurement approach were able to set aside regulatory capital in conformity with the overall economic capital requirements of banks, thus extinguishing any incentives for regulatory arbitrage476_{. This opinion of his, was somewhat a} response to the general perception that banks using the AMA, encouraged regulatory arbitrage, and further suggested that the general view that AMA enabled banks to set aside lower capital charges in comparison to the BIA and the STA was not an outcome set in stone but rather an issue worthy of further debate477_.

Ironically the ambit of choices that banks using the AMA have, has led to a number of disagreements amongst scholars as to what really constitutes AMA. These differing opinions have not been helped by the fact that two years after the birth of the AMA, the BCBS introduced a capital threshold478 applicable to both credit and operational risk, the purpose of which was to ensure that the computed capital charge did not fall below a minimum threshold level following a bank’s transition to the internal measurement approach (IMA).

There is a considerable volume of literature that propagates the different views of eminent scholars on what really constitutes the advanced measurement approach (AMA). Imad Moosa suggests in his article479 _that these views, some of which are far removed from the other (or basically occupy opposite sides of the spectrum of views) depend on:

475 _{Slaughter & May LLP, ‘The New Basel Accord Capital Guide’ (n469) 75.}

476 _{Imad A Moosa, ‘A Critique of the Advanced Measurement Approach to Regulatory Capital} against Operational Risk’, (2008) Journal of Banking Regulation Volume 9(3), 151.

477 ibid.

478_{90% in 2008 and 80% in 2009. See Slaughter & May LLP ‘The New Basel Capital Accord} Guide’ (n469) 76.

479

How the techniques implemented in the AMA are listed under the AMA; Whether these listed techniques are implemented individually or in tandem with each other in the calculation of capital towards operational risk thus complementing one another; or

Whether the listed techniques are actually different forms/aspects relating to the same process or indeed are not linked at all and are completely different.

Notwithstanding the above views of what actually constitutes the advanced measurement approach, banks which seek to implement the AMA are required to satisfy certain requirements set out in annexures 6 and 7 of Basel 2480_{. Firstly, banks implementing the AMA must ensure that its own internal} operational risk measurement framework or process is represented or reflected by the different event types that constitute operational risk481_. Secondly, the loss(es) a bank incurs as a result of operational risk must be capable of falling under the different categories of business lines such as retail, banking, trading and sales etc.

The final but by no means the least requirement, which infact is central to the computation of the capital charge for operational risk is that under the AMA, banks are under a requirement to calculate the capital charge using its own model482 _{to compute the summation of expected loss (EL) and unexpected} loss (UL) for all types of operational risk exposure across each business line. Where expected loss(es) have already been taken into consideration by the bank, then the operational risk charge would be expected to be computed based on unexpected loss(es) only.

Returning to the issue of what constitutes the advanced measurement approach, Moosa argues that the definition of AMA as represented by the BCBS constitutes the Loss Distribution Approach (LDA); Scenario-based Approach (SBA) and the Scorecard Approach (SCA), but excluding the

480_{BCBS, ‘International Convergence of Capital Measurement and Capital Standards’ (A} Revised Framework) June 2004.

481

Such as Internal/External fraud; Internal failures of management and control systems etc. 482

It is imperative that the model used by the bank, together with the components of the model such as data, data analysis and any internal or external factors considered are accurate.

Internal Measurement Approach (IMA). However, he explains further by adding that whilst the LDA relies on both internal and external data which are historical in nature, the SCA and the SBA on the other hand rely on hypothetical data that has been compiled through ‘expert opinion’483 _where reliance has either been placed on certain scenarios or the outcome(s) resulting from the assessment of various drivers of risk as well as indicators and control mechanisms484_.

Notwithstanding the requirements that banks implementing the AMA ought to satisfy, it is an acceptable fact (even recognised by the BCBS) that banks may mitigate against operational risk by taking out risk insurance. Risk insurance taken out by banks implementing the AMA allows such banks to reduce the charge for operational risk485. Although the BCBS concedes that this practice might occur, (even though such measures are undertaken probably to counteract the operational risk exposure due to counterparty risk) it is submitted that this practice may be questionable on moral grounds as it tends to defeat the very essence and purpose for which operational risk charge is calculated.

4.10 Criticism of Risk measuring methodologies/approaches under