Final answer:
The approach used in calculating capital to cover operational risk that allows banks to rely on internal data for regulatory capital requirements is the Advanced Measurement Approach (AMA). It allows banks to customize their capital requirements based on their specific operational risk profile and the effectiveness of their risk management practices.
Step-by-step explanation:
The approach used in calculating capital to cover operational risk that allows banks to rely on internal data for the calculation of regulatory capital requirements is the Advanced Measurement Approach (AMA). The AMA is a framework used by banks to calculate their capital requirements for operational risk based on their internal data and models. This approach allows banks to take into account their specific operational risk profile and the effectiveness of their risk management practices.
Under the AMA, banks develop their models to estimate operational risks, taking into account a range of factors such as historical loss data, scenario analysis, and key risk indicators. The internal data allows banks to have a more accurate and customized calculation of their capital requirements, compared to the standardized approaches used by regulators.
However, the use of the AMA requires approval from regulators, and banks need to demonstrate that their internal data and models are robust and in compliance with regulatory requirements.