Advanced Measurement Approaches (AMA)

1. An approach to measuring operational risk that is systematic and presumably based

on events events that can be measured with objective statistics.
2. Full - In the AMA, banks may use their own method for assessing their exposure to
operational risk, so long as it is sufficiently comprehensive and systematic. The
extent of detailed standards and criteria for use of the AMA are limited in order to
accommodate the rapid evolution in operational risk management practices that the
Committee expects to see over the coming years.

Basic indicator approach

The basic approach or basic indicator approach is a set of operational risk measurement techniques
proposed under Basel II capital adequacy rules for banking institutions.

Basel II requires all banking institutions to set aside capital for operational risk. Basic indicator approach is
much simpler compared to the alternative approaches (i.e.standardized approach (operational
risk) and advanced measurement approach) and this has been recommended for banks without significant
international operations.

Based on the original Basel Accord, banks using the basic indicator approach must hold capital for operational
risk equal to the average over the previous three years of a fixed percentage of positive annual gross income.
Figures for any year in which annual gross income is negative or zero should be excluded from both the
numerator and denominator when calculating the average.

The fixed percentage ‘alpha’ is typically 15 percent of annual gross income.

Advanced measurement approach

Under Basel II, operational risk charges can be calculated by using one of the three methods (or
approaches) that increase in sophistication and risk sensitivity: (i) the Basic Indicator Approach; (ii) the
Standardised Approach; and (iii) Advanced Measurement Approaches (AMA).

Under AMA the banks are allowed to develop their own empirical model to quantify required capital for
operational risk. Banks can use this approach only subject to approval from their local regulators. Once a
bank has been approved to adopt AMA, it cannot revert to a simpler approach without supervisory
approval.

Also, according to section 664 of original Basel Accord, in order to qualify for use of the AMA a bank must
satisfy its supervisor that, at a minimum:

 Its board of directors and senior management, as appropriate, are actively involved in the oversight of
the operational risk management framework;
 It has an operational risk management system that is conceptually sound and is implemented with
integrity; and
 It has sufficient resources in the use of the approach in the major business lines as well as the control
and audit areas.

Net Interest Income

Definition of
'Net Interest
Income'
The difference
between the
revenue that is
generated from a
bank's assets and
the expenses
associated with
paying out its
liabilities. A typical
bank's assets
consist of all forms
of personal and
commercial loans,
mortgages and
securities. The
liabilities are, of
course, the
customer deposits.
The excess
revenue that is
generated from
the spread
between interest
paid out on
deposits and
interest earned on
assets is the net
interest income.

Investopedia explains 'Net Interest Income'

The net interest income of some banks is more sensitive to
changes in interest rates than others. This can vary according to
 several factors, such as the type of assets and liabilities that are
held. Banks with variable rate assets and liabilities will obviously
be more vulnerable to changes in interest rates than those with
fixed-rate assets. Banks with liabilities that reprice more often or
quicker than its assets will also be affected by interest rate
changes.

Non-Interest Income
Definition of
'Non-Interest
Income'
Bank and creditor
income derived
primarily from
fees. Examples of
non-interest
income include
deposit and
transaction fees,
insufficient funds
(NSF) fees, annual
fees, monthly
account service
charges, inactivity
fees, check and
deposit slip fees,
etc. Institutions
charge fees that
provide non-
interest income as
a way of
generating
revenue and
ensuring liquidity
in the event of
increased default
rates.

Investopedia explains 'Non-Interest Income'

Non-interest income makes up a significant portion of most banks'
and credit card companies' revenue. In 2008 alone, credit card
issuers took in over $19 billion in penalty-fee income alone – this
includes late fees and over-the-limit fees, among others. The
passage of the Credit Card Accountability, Responsibility and
Disclosure (CARD) Act of 2009 included sweeping restrictions on
credit card companies' ability to generate non-