Module: | MODULE B: RISK MANAGEMENT
Q315: Consider the following statements regarding the Advanced Measurement Approaches (AMA) for Operational Risk:
1. Banks using AMA rely entirely on regulator-provided external loss data to calculate their capital requirements.
2. A bank must possess a minimum of five years of internal operational loss data to qualify for the AMA approach.
3. The calculated capital charge under AMA is designed to cover both expected losses and unexpected losses, unless the expected losses are already adequately provisioned for.
Which of the statements given above is/are correct?
2. A bank must possess a minimum of five years of internal operational loss data to qualify for the AMA approach.
3. The calculated capital charge under AMA is designed to cover both expected losses and unexpected losses, unless the expected losses are already adequately provisioned for.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is incorrect: The defining characteristic of the Advanced Measurement Approaches (AMA) is that banks use their own proprietary, internally generated operational loss data models, not regulator-provided external data (though external data might supplement internal data). Statement 2 is correct: To secure regulatory approval to use the sophisticated AMA model, the Basel framework strictly mandates that a bank must have at least five years of high-quality internal historical loss data.
Statement 3 is correct: The AMA capital charge must provide coverage for both Expected Loss (EL) and Unexpected Loss (UL). However, a bank can reduce the capital requirement for EL if it can demonstrate to regulators that it has already adequately provisioned for those expected losses in its normal accounting practices.
Statement 3 is correct: The AMA capital charge must provide coverage for both Expected Loss (EL) and Unexpected Loss (UL). However, a bank can reduce the capital requirement for EL if it can demonstrate to regulators that it has already adequately provisioned for those expected losses in its normal accounting practices.