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AMA | LDA |
Advantages & Disadvantages
>Advantages
It is highly risk sensitive, making direct use of banks
internal loss data
No assumptions are made about relationship between expected
and unexpected losses
Provided that an estimation methodology is
correct, LDA provides an accurate capital charge
>Disadvantages
Loss distributions may be complicated to estimate
VaR confidence level is not agreed upon,
and whether 99.9% or higher/lower percentile is considered makes a significant
difference on the capital charge
Extensive internal data sets (at least five years) are
required
The approach lacks a forward-looking
component because the risk assessment is based only on the past loss history
Historical data dependency
The approach is applicable to banks with extensive and
properly managed databases