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