Cross-border Operational Risk AMA could be problematic

The Institute for International Finance (IIF) has said that international banking groups wanting to adopt the Basel II Advanced Measurement Approach for operational risk could run into "serious obstacles".

The Advanced Measurement Approach (AMA) allows banks to tailor their operational risk methodologies to their business mix and organisational structures. Adopting Basel II AMA will allow banks in many instances to improve the quality of their internal operational risk measurement and ensure sound and comprehensive operational risk management.

However, for banks having operations in more than one regulatory jurisdiction this could be problematic as a number of national regulators have indicated their unwillingness to permit the "hybrid AMA" proposed by the Basel Committee to deal with impediments to the cross-border implementation of an AMA for operational risk.

The Basel Committee's suggested approach, proposed in January 2004, sets out how a banking organisation calculating a group-wide Basel II AMA capital requirement might calculate the operational risk capital requirements of its subsidiaries. It permits – subject to supervisory approval – the use of a combination of stand-alone AMA calculations for "significant internationally active banking subsidiaries" and an allocated portion of the group-wide AMA capital requirement for its other smaller internationally active banking subsidiaries.

It is this matter of supervisory approval that is proving a stumbling block with a number of national regulators, although the EU in its Capital Requirements Directive (their implementation of Basel II) supports the approach including for EU subsidiaries that are part of banking groups headquartered outside of the EU.

Daniel Bouton, the outgoing Chairman of the Steering Committee on Regulatory Capital at the IIF said, "We recognise the complexity of this issue and that quantifying operational risk is a relatively new area in risk management. Nevertheless, it would be highly unfortunate if the advanced methodologies agreed by bankers and regulators would not be applied for subsidiaries in crucial jurisdictions. Banks have made considerable efforts to develop systems of operational risk measurement and to collect data on historical losses, and it would be regrettable if regulators in some jurisdictions do not allow banks to use these major advances in operational risk management. We strongly encourage the Basel Committee to work with national authorities to facilitate meaningful implementation that is consistent with the Accord."