Moody's Welcome Basel Committee U-turn on Operational Risk

Moody’s said that the Basel Committee’s agreement to no longer mandate a floor capital requirement on operational risk for those banks that will adopt the Advanced Measurement Approach (AMA) will most likely stimulate further advances in banks’ operational risk measurement and management. Moody’s noted that a floor capital requirement would have limited to some extent the incentives for banks to develop a more sophisticated approach to operational risk measurement and management. As things stand now, several major global banks, which have made more significant advances in operational risk management, should find an additional incentive to develop further their risk-management approach. At the same time, Moody’s added that, in all likelihood, more banks (but clearly not a majority) may consider in the future adopting AMA for operational risk management, therefore trying to take advantage of the reduced capital charge. In this developing context, operational risk management is going to represent an increasingly central element in banks’ overall risk management practices.

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