The AMA-2 Framework is a RASB led practitioner/academia collaboration. It integrates accounting, operating, risk, and loss data within a common OpRisk quantification and reporting framework. It leverages the algorithms included in the Risk Accounting method and the RU, a common metric that expresses all forms of OpRisk.
AMA 2 – The Integrated OpRisk Framework
- Integrated Framework:
- Accounting data
- Operating data
- Risk data
- Loss history
- Stochastic modelling
- Two New Modules:
- Enhanced RCSA
- OpRisk Calculation Engine
The integration of accounting, operating, risk, and loss data within the AMA-2 Framework is achieved through the addition of two new modules:
1. Enhanced Risk & Control Self-Assessment:
The first module is an enhanced risk & control self-assessment (RCSA) where traffic-light or ‘RAG’ assessment metrics, typically used in RCSAs, are replaced by numeric weights and risk factors. This enables the calculation of a risk mitigation index (RMI) for each business component that completes an assessment being a measure – on a scale of zero to 100 – of risk mitigation effectiveness.
2. OpRisk Calculation Engine:
The second module is an OpRisk calculation engine that produces an explicit and dynamic calculation of Inherent RUs (maximum OpRisk exposure) by product from daily new business transaction data available in accounting systems that is combined with RMIs to produce Residual RUs (actual OpRisk exposure). The engine also produces comprehensive analytics in RUs by business component, product, customer, and location including the setting and monitoring of OpRisk limits.
OpRisk is created upon the transfer of financial products and instruments to external parties as it is sales and trades that set supply chains and operating infrastructures into action. Inherent OpRisk (Inherent RUs) is calculated by combining two product related risk factors in an algorithm:
- Exposure Uncertainty Factors (EUFs): relate to the relative operating complexity and consequent process burden each product imposes on the organisation
- Value Band Weightings (VBWs): relate to the daily production throughput
Residual OpRisk (Residual RUs) is calculated by reducing Inherent RUs by the Risk Mitigation Index (RMI) calculated from Enhanced RCSAs.
The View from the Basel Committee
“…range of practice continues to be broad… diversity of modelling approaches… clearly affects the AMA methodology of individual banks and, ultimately, the amount of capital resulting from the application of the AMA”
“While flexibility allows modelling to reflect individual bank risk profiles, it also raises the possibility that banks with similar risk profiles could hold different levels of capital under the AMA if they rely on substantially different modelling approaches and assumptions”
“The inherent complexity of the AMA and the lack of comparability arising from a wide range of internal modelling practices have exacerbated variability in risk-weighted asset calculations and have eroded confidence in risk-weighted capital ratios”
“The Committee has therefore determined that the withdrawal of internal modelling approaches for operational risk regulatory capital from the Basel Framework is warranted”