Advanced Measurement Approach (AMA)

The Advanced Measurement Approach (AMA) is a method used by financial institutions to calculate the amount of capital they need to hold to cover potential credit risks. Instead of relying solely on standard formulas, banks develop their own models to assess the likelihood of borrower defaults and potential losses. This approach allows for a more tailored and accurate reflection of a bank's actual risk profile. By using AMA, banks can better align their capital reserves with their specific risk exposures, promoting financial stability while encouraging sound risk management practices.