RMA Comment Letter Supports Recalibration of Basel's SMA Formula

RMA Finds Variances between Current and Proposed Op Risk Capital Standard Calculations ‘Troubling’

Philadelphia, PA (June 10, 2016)—

The Advanced Measurement Approaches Group of The Risk Management Association (RMA) has filed a comment letter with the Basel Committee on Banking Supervision that notes concerns regarding the Basel Committee’s “Standardised Measurement Approach for Operational Risk” Consultative Document.

The Standardised Measurement Approach (SMA) represents a new formula for financial institutions to determine the amount of operational risk regulatory capital to hold in reserve. The members of the Advanced Measurement Approaches Group (AMAG) have noted wide variances from current U.S. regulator-approved AMA capital levels and have requested that the Basel Committee recalibrate its SMA formula with a view towards better alignment to current approved operational risk capital levels. In addition, the AMAG identified several other issues and concerns regarding the SMA:

  • The formula does not take into account the effect of discontinued businesses, insurance hedging, and other mitigating factors on capital allowances.
  • The new standard could prove to be unreasonably conservative for banks with minimal losses.
  • There are extreme variances in how SMA would affect each institution. For example, some institutions would need to increase regulatory capital by as much as 47 percent, while others would see a decrease of as much as 46 percent. On average, according to an RMA survey, the Advanced Measurement Approaches Group institutions would need to increase operational risk capital levels by 17.1 percent.

 “Such swings from what, arguably, had been a more risk-sensitive model to one that is far less so are clearly troubling,” the RMA letter says. “Additional work is needed by the [Basel] committee on the calibration of the formula to reduce the variances between current AMA models and the proposed SMA model, and better align the results.” 

The letter seeks a 30-day comment period following the Basel Committee’s publication of recalibration information.

About RMA

Founded in 1914, The Risk Management Association is a not-for-profit, member-driven professional association whose sole purpose is to advance the use of sound risk management principles in the financial services industry. RMA promotes an enterprise approach to risk management that focuses on credit risk, market risk and operational risk. Headquartered in Philadelphia, Pennsylvania, RMA has 2,500 institutional members that include banks of all sizes as well as nonbank financial institutions. They are represented in the Association by 18,000 individuals located throughout North America, Europe, Australia and Asia/Pacific.

The AMAG was formed by RMA in 2005 at the suggestion of the U.S. AMA-BQT (formerly the Inter-Agency Working Group on Operational Risk). The purpose of the AMAG is to share industry views on aspects and implementation of Advanced Measurement Approaches (“AMA”) and operational risk aspects of the Comprehensive Capital Assessment and Review (“CCAR”) and Dodd-Frank Act Stress Test (“DFAST”) exercises with the U.S. financial services federal regulatory agencies. The Group consists of operational risk management professionals working at financial services organizations throughout the United States. The AMAG is open to any financial institution regulated in the United States that is either mandated, opting in, or considering opting in to AMA, or is required to conduct CCAR and/or DFAST exercises. A senior officer responsible for operational risk management serves as the primary representative of each AMAG member institution.

Media Contacts 

Stephen Krasowski, skrasowski@rmahq.org, 215-446-4095
Frank Devlin, fdevlin@rmahq.org, 215-446-4137