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The most sophisticated approach suggested is advanced

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The most sophisticated approach suggested is advanced measurement approach (AMA).Under the AMA, the regulatory capital requirement will equal the risk measures generatedby the bank’s internal operational risk measurement system using quantitative andqualitative criteria for the AMA. Internal data used must be based on a minimum historicalobservation period of five years. However, when a bank first moves to AMA, a three-yearperiod is acceptable.Contd...
LOVELY PROFESSIONAL UNIVERSITY51Unit 4: Risk AnalysisNotesBanks need to employ the quantitative approaches like Internal Measurement Approach(IMA) or Loss distribution Approach (LDA) or Balance Scorecard Approach (BSA) foradopting AMA. All AMA approaches compute the expected and unexpected loss. The mostsignificant aspect for a bank to graduate from Basic Indicator Approach (BIA) to AdvancedMeasurement Approach (AMA) is the potential benefit of less capital allocation foroperational risk.As op-risk involves failures during operations in daily business, the key steps in op-riskmanagement involve improving internal control environment, designing and developingprocedures to implementing the risk management processes and employing risk transfertechniques, such as insurance, to mitigate the loss arising from operational risk. Creditrating agencies have started rating banks based on their risk control and managementframeworks. Investor awareness has also increased to the extent that banks with robustrisk management frameworks are able to attract strategic investments with less effort.Given the known benefits of implementing the provisions of the Basel II accord, banksshould prioritise their strategy towards op-risk management. A constructive approach inthis direction could be to automate the suggested five-step approach and, as a first step, tostart developing a loss event database.Source:4.5 SummaryRisk is virtually anything that threatens or limits the ability of an organization to achieveits mission.Risk management is a process to identify and then manage threats which could severelyimpact or bring down the organization.Successful risk management needs the involvement of all levels of employers of anorganization.To successfully manage their risk in the future, organizations need to develop an enterprise-wide risk management framework.Organizations should regularly undertake comprehensive, focused assessment of potentialrisks to the organization. This focused assessment should occur at least twice a year by ateam of staff members representing all the major functions of the organization.The purpose of a risk assessment is to help management create appropriate strategies andcontrols for stewardship of information assets.

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