What changed
RBI released comprehensive guidelines for the Advanced Measurement Approach (AMA) for calculating operational risk capital charge, building on earlier circulars. Banks can now apply to migrate to AMA from April 1, 2012, after meeting qualitative requirements. The new guidance supersedes any conflicting provisions in the 2005 operational risk management note.
What it means for you
Banks can now use more sophisticated internal models to calculate operational risk capital, potentially lowering capital requirements if models are robust. However, the approval process is rigorous, requiring preliminary and detailed assessments by RBI. Banks must ensure strong risk management systems and modeling processes before applying.
What you must do
- Assess your bank's preparedness against the new AMA guidelines before applying.
- Submit a notice of intention to RBI's Department of Banking Operations & Development when ready.
- Consider moving to the Standardised Approach first to build groundwork for AMA.
- Ensure all qualitative requirements for operational risk management are met.
Who it affects
All commercial banks (excluding RRBs and LABs), Risk management departments, Capital planning teams
Can a bank using Basic Indicator Approach directly switch to AMA?
Yes, the circular allows banks following BIA to switch directly to AMA, but they must meet all qualitative requirements.
What is the process for RBI approval to use AMA?
Banks must first give a notice of intention, then RBI conducts a preliminary assessment. If satisfactory, the bank can make a formal application, followed by a detailed analysis before approval.