Advanced Measurement Approach

The term Advanced Measurement Approach ( AMA ) or advanced measurement approach a is in the banking sector method for measuring the operational risk in a bank understood.

classification

Classification of the AMA in Basel II

In contrast to the basic indicator approach and the standardized approach , there are no fixed procedures for calculating operational risk for the AMA . Instead of these specifications, there is a catalog of requirements, which represents a comprehensive expansion compared to the catalog of requirements for the standard approach. To be able to apply the AMA, all requirements of the extended catalog of requirements must be met.

The AMA grants each credit institution its own degree of freedom to design a calculation method for determining the equity deposit. There are, for example, the loss distribution approach or scorecard approaches. In order to use an ambitious measurement approach, a historical time series of at least 5 years of internal loss must be available.

The goals of the AMA can be broken down according to the goals of the credit institutions and the goals of the Basel Committee .

Goals of the credit institutions

For credit institutions, the implementation of the “expensive” advanced approach certainly aims primarily to reduce the equity to be deposited , in contrast to the use of “simple” approaches. In connection with this, however, it is recommended not only to consider the banking supervisory background, but also to use the economic aspects envisaged by the Basel Committee. This includes, for example, an equity deposit that is as risk-adequate as possible in order to create an optimal relationship between the necessary risk buffer and the costs of tying up capital .

Goals of the Basel Committee

The AMA offers credit institutions their own scope for measuring operational risks within a framework defined by catalogs of requirements. With the creation of such a measurement approach, the Basel Committee is pursuing the goal of actively involving credit institutions in innovation in the field of measuring operational risks:

" [...], the Committee has developed the concept of Advanced Measurement Approaches in recognition that a variety of potentially credible approaches to quantifying operational risk are currently being developed by banking institutions and that the regulatory regime should not stifle innovation at this critical point in the development process. "

- Working Paper on the Regulatory Treatment of Operational Risk ; Bank for International Settlements, download from the Deutsche Bundesbank , September 2001, p. 5.

At this point, the questions can be asked in advance whether and when the Basel Committee will prescribe appropriate procedures for the advanced approach and what influence such a definition will have on the use of the simple procedures.

Categorization of the AMA

As already shown, there is no standard procedure for the advanced measurement approach. Nevertheless, the Basel Committee refers to studies by the Risk Management Group (RMG), in which it divided the various approaches into three main categories for measuring operational risks through surveys of industrial companies:

Internal measurement approach

With the internal measurement approach (IMA), credit institutions calculate the capital to be deposited for risks based on assumptions for expected losses from operational risks. This means that a constant relationship between expected and unexpected losses is assumed. Both a linear relationship and a non-linear relationship can be assumed here. The former implies that the equity deposit is a multiple of the expected loss, and the latter requires more complex functions to calculate the equity to be deposited. Regulations based on the IMA approach divide the risk exposure into business areas and risk event types. This means that the risk is quantified individually for each business area and risk event type. Typically, the expected loss is determined by combining the estimated loss frequency and estimated loss amount of different business area risk combinations.

Division into 8 business fields and 7 event categories: Matrix comprising 56 fields: Groups of potential events. E.g .: losses due to fraud or property damage

{\ displaystyle K_ {IMA} = \ Sigma _ {j = 1} ^ {8} \ Sigma _ {i = 1} ^ {7} [\ gamma _ {i, j} EI_ {i, j} P_ {i , j} LGE_ {i, j}]}

{\ displaystyle = \ Sigma _ {j = 1} ^ {8} \ Sigma _ {i = 1} ^ {7} [\ gamma _ {i, j} EL_ {i, j}]}

The sum of the weighted combined field-specific expected losses results in the total capital requirement for the operational risk of the credit institution. ${\ displaystyle \ gamma}$

Loss sharing approach

The Loss Distribution Approach (LDA) is an extension of the internal assessment rate and attempts to derive unexpected losses from expected losses through a direct estimate. With the loss distribution approach, credit institutions estimate the probable distribution over a future period for each individual or group of business area risk combinations. The capital adequacy deposit is based on a high probability density of a loss frequency distribution . With the LDA, the overall loss frequency distribution is based on assumptions about the likely number and magnitude of risk events that will occur. So both the distribution of the number and the distribution of the amount of loss events are included. It must be noted, however, that both are considered independently of one another, i.e. each represent an independent distribution function . Different distribution functions can be used for each individual assumption. It would make sense to use a Poisson distribution ( discrete probability distribution ) for the number and a logarithmic normal distribution for the magnitude of the loss events. The main difference between the LDA and the IMA is the fact that the LDA aims more at a direct estimate of unexpected losses, while the IMA tries to estimate the loss estimate by making assumptions about the relationships between linear and non-linear, expected and unexpected losses .

{\ displaystyle K_ {LDA} = \ Sigma _ {j = 1} ^ {J} \ Sigma _ {i = 1} ^ {I} VaR_ {i, j}}

Scorecards

With the scorecard approach, credit institutions set a starting sum of equity for operational risks and modify the amount from time to time on the basis of scorecards . The aim of the scorecards is to record the risk profile and the risk control environment of various business areas and a future- related risk control to minimize the number and amount of future risk events. It is a qualitative method. On the scorecards, for example, the changed quality of the operational risk management system and additional control systems are assessed. The scorecards show the current characteristics of risk-influencing indicators. In this way, a future-oriented component is also taken into account.

literature

Kaiser, T. / Koehne, F .; Operational risks in financial institutions; 1st edition, Gabler Verlag, November 2004, Wiesbaden