OPERATIONAL RISK STANDARDISED APPROACH ADVANCED MEASUREMENT APPROACH

Operational risk standardised approach advanced

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OPERATIONAL RISK STANDARDISED APPROACH ADVANCED MEASUREMENT APPROACH STANDARDISED APPROACH
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BENEFITS: i. Better allocation of capital and reduced impact of moral hazard through reduction in the scope for regulatory arbitrage: By assessing the amount of capital required for each exposure or pool of exposures, the advanced approach does away with the simplistic risk buckets of current capital rules. ii. Improved signal quality of capital as an indicator of solvency: the proposed rule is designed to more accurately align regulatory capital with risk, which will improve the quality of capital as an indicator of solvency. iii. Encourages banking organizations to improve credit risk management: One of the principal objectives of the proposed rule is to more closely align capital charges and risk. For any type of credit, risk increases as either the probability of default or the loss given default increases. iv. More efficient use of required bank capital: Increased risk sensitivity and improvements in risk measurement will allow prudential objectives to be achieved more efficiently. v. Incorporates and encourages advances in risk measurement and risk management : The proposed rule seeks to improve upon existing capital regulations by incorporating advances in risk measurement and risk management made over the past 15 years. vi. Recognizes new developments and accommodates continuing innovation in financial products by focusing on risk: The proposed rule also has the benefit of facilitating recognition of new developments in financial products by focusing on the fundamentals behind risk rather than on static product categories. 5.2 Benefits & Limitations of BASEL II
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