Efficiently” Operational Risk Measurement beyond SMA approach: a comparative and sensitivity analysis

BCBS (2013) and EBA (2013) studies demonstrate that a large amount of risk-weighted asset variability (RWA) is due to the lack of comparability between the operational risk internal model. BCBS has recognized the need to update its operational risk capital requirements framework; in a consultative paper issued in 2016, BCBS proposed to remove the Advanced Measurement Approach from the regulatory framework with the aim to address the weaknesses identified in the existing regulatory approaches and to introduce a new Standardised Measurement Approach for operational risk (SMA). The new SMA determines a bank’s operational risk capital requirements based on two components: (i) a measure of a bank’s income; and (ii) a measure of a bank’s historical losses. With the aim to test the effectiveness of this new operational regulatory framework, in this paper, we propose a: a) comparative analysis between the new regulatory SMA model (Standard Measurement Approach) and an Advanced Measurement Approach; b) a risk factor sensitivity analysis of the two approaches with the purpose to finally underline the importance to give a regulatory relevance to measurement’s tools directly connected to operational risk level