ABSTRACT
A book on the Advanced Measurement Approach, and especially on the Loss Distribution method, rests on the fundamental assumption that the approach can be implemented in a meaningful way. This is not generally accepted. For example, Ong (1998) was, and may still be, convinced that: “the only buffer against operational risk is not some quantified measure but educated people who are careful, technologically aware, informed and compliant with internal policies.” We, on the other hand, think otherwise. We believe that the rationale “capital against risk” is sound. Since the advent of public companies, shareholders’ equity has been seen to fulfil exactly this role. That being so, the accurate quantification of such capital is a desirable and useful measure. We grant that it cannot be purely scientifically determined, due to the vagaries of human nature and the uncertain outcomes of human endeavours. However, within such parameters, the assessment of risk capital must nonetheless strive to be comprehensive, traceable, transparent, sensible and commensurate with the potential risk involved. As the figure is added to the other risk capital figures, it should be on an equal footing with those methodologies and their ranges of error. We think that we have argued sufficiently for this cause.
