This paper proposes a methodology to analyze the implications of the Advanced
Measurement Approach (AMA) put forward by the Basel II Accord for the assessment of
operational risk. We develop an integrated procedure for the construction of the distribution
of aggregate losses, using internal and external data. It is illustrated on a 2x2 matrix of two
selected business lines and two event types, drawn from a database of 3000 losses obtained
from a large European banking institution. For each cell, the method calibrates three truncated
distributions functions for the body of internal data, the tail of internal data, and external data.
When the dependence structure between aggregate losses and the non- linear adjustment of
external data are explicitly taken into account, the regulatory capital computed with the AMA
method is substantially lower than with less sophisticated approaches, although the effect is
not uniform. We then estimate the effects of operational risk management