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The identification and measurement of operational risk is a real and live issue for modern-day banks, particularly since the decision by the Basel Committee on Banking Supervision (BCBS) to introduce a capital charge for this risk as part of the new capital adequacy framework .
On March 4, 2016, the Basel Committee on Banking Supervision finally updated its proposal for calculating operational risk capital, introducing the Standardized Measurement Approach (“SMA”). Building upon its 2014 version, the SMA would not only replace the existing standardized approaches, but also the Advanced Measurement Approach.
Advanced measurement approach (AMA) is one of three possible operational risk methods that can be used under Basel II by a bank or other financial institution.The other two are the Basic Indicator Approach and the Standardised Approach.
A series of proposals to enhance the Basel II framework was announced by the Basel Committee in January 2009. The proposals included: revisions to the Basel II market risk framework; the guidelines for computing capital for incremental risk in the trading book; and proposed enhancements to the Basel II framework. [8]
Basel III requires banks to have a minimum CET1 ratio (Common Tier 1 capital divided by risk-weighted assets (RWAs)) at all times of: . 4.5%; Plus: A mandatory "capital conservation buffer" or "stress capital buffer requirement", equivalent to at least 2.5% of risk-weighted assets, but could be higher based on results from stress tests, as determined by national regulators.
The Basel Committee formulates broad supervisory standards and guidelines and recommends statements of best practice in banking supervision (see bank regulation or "Basel III Accord", for example) in the expectation that member authorities and other nations' authorities will take steps to implement them through their own national systems.
Basel II requires all banking institutions to set aside capital for operational risk. The basic indicator approach, however, is much simpler as compared to the alternative approaches (i.e. standardized approach (operational risk) and advanced measurement approach ) and thus has been recommended for banks without significant international ...
It does not supersede either Basel I or II but focuses on reforms to the Basel II framework to address specific issues, including related to the risk of a bank run. The Basel Accords have been integrated into the consolidated Basel Framework, which comprises all of the current and forthcoming standards of the Basel Committee on Banking Supervision.
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