Implementation of the Advanced Measurement Approach (AMA) for Calculation of Capital Charge for Operational Risk

 Implementation of the Advanced Measurement Approach (AMA) for Calculation of Capital Charge for Operational Risk

RBI/2010-11/488

DBOD.No.BP.BC. 88 /21.06.014/2010-11

April 27, 2011

The Chairman and Managing Directors /

Chief Executive Officers of All Commercial Banks

(Excluding Regional Rural Banks and Local Area Banks)

Dear Sir,

Implementation of the Advanced Measurement Approach (AMA)

for Calculation of Capital Charge for Operational Risk

Please refer to our circular DBOD.No.BP.BC.23/21.06.001/2009-10 dated July 7, 2009, inter alia advising banks that they can apply for migrating to Advanced Measurement Approach (AMA) for calculation of capital charge for Operational Risk from April 1, 2012 onwards.

2. The Basel II Framework presents three methods for calculating operational risk capital charge in a continuum of increasing sophistication and risk sensitivity:

        i.            the Basic Indicator Approach (BIA);

      ii.            the Standardised Approach (TSA)/ Alternative Standardised Approach (ASA); and

    iii.            Advanced Measurement Approaches (AMA).

3. The guidelines for calculating operational risk capital charge for BIA and TSA/ASA have been issued separately. The guidelines on AMA for computing capital charge for operational risk are annexed. The various aspects of the guidance vis-a-vis the form in which they find place in Basel II Framework, have been elaborated upon in order to provide a comprehensive background to important concepts used in measurement and management of operational risk.

4. This guidance is in addition to that contained in 'Guidance Note on Management of Operational Risk' issued by RBI vide its circular DBOD.No.BP.BC.39/21.04.118/2004-05 dated October 14, 2005 and wherever there is conflict between the two, the guidance contained in this circular would prevail.

5. Banks intending to migrate to AMA for computing capital charge for operational risk are advised to assess their preparedness with reference to these guidelines. As and when they are ready for introduction of AMA, they may first give Reserve Bank of India (RBI) (Chief General Manager-in-Charge, Reserve Bank of India, Department of Banking Operations & Development, Central Office, 12th Floor, Shahid Bhagat Singh Road, Mumbai - 400001), a notice of intention. RBI will first make a preliminary assessment of the bank’s risk management system and its modeling process. If the result of this preliminary assessment is satisfactory, RBI will allow the bank to make a formal application for migrating to AMA. RBI will then perform a detailed analysis of the bank's risk management system and proposed model prior to according approval.

6. It may be reiterated that banks would have the discretion to adopt AMA, while continuing with simpler approaches for computation of capital for credit and market risks. Further, a bank following BIA can switch over to the AMA directly. However, as banks are aware, all the qualitative requirements relating to operational risk management applicable to TSA form part of the qualitative requirements for AMA. Therefore, a bank may also consider moving to TSA first so that the work done in the implementation of TSA could be used to meet part of the requirements for AMA as and when the bank considers switching over to that approach.

Yours faithfully,

(B. Mahapatra)

Chief General Manager-in-Charge

Encls: As above