LO 44.2: Compare the SMA to earlier methods of calculating operational risk

LO 44.2: Compare the SMA to earlier methods of calculating operational risk capital, including the Alternative Measurement Approaches (AMA), and explain the rationale for the proposal to replace them.
Before the development of the SMA, banks were using either the advanced measurement approach (AMA), the standardized approach (TSA), or its variation, the alternative standardized approach (ASA), to assess operational risk. The advanced measurement
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Topic 44 Cross Reference to GARP Assigned Reading – Basel Committee on Banking Supervision
approach, which was introduced as part of the Basel II framework in 2006, allowed for the estimation of regulatory capital based on a range of internal modeling practices. This approach was a principles-based framework allowing for significant flexibility. Although the hope of the Basel Committee was for best practices to emerge as flexibility declined, this never happened and challenges associated with comparability among banks (due to a wide range of modeling practices) and overly complex calculations remained.
Given these challenges, the Basel Committee set a goal of creating a new measure to allow for greater comparability and less complexity relative to prior methods. The SMA was created as this measure, with the intent of providing a means of assessing operational risk that would include both a standardized measure of operational risk and bank-specific loss data. Unlike AMA, the SMA is a single, non-model-based method used to estimate operational risk capital that combines financial statement information with the internal loss experience of a specific bank. The SMA is to be applied to internationally active banks on a consolidated basis, whereas it is optional for non-internationally active institutions. Although it is a relatively new measure, the SMA combines key elements of the standardized approach along with an internal loss experience component that was central to older approaches.
I d e n t i f i c a t i o n , C o l
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