AML Risk Adjusted Performance Indicators: Assumptions & Methodology

Abstract

In this paper, starting from the "holistic" approach of the European Banking Authority (EBA) which reinforces the relevance of antimoney laundering in the prudential assessment of banks, a conceptual scheme is proposed for the calculation of the Economic Value Added of banking products showing how, in the face of various activities required for AML purposes (from onboarding to alert management to constant monitoring), the economic convenience of a relationship can be determined ex ante, at least for each product. The results confirm that for the same creditworthiness and cost of capital, the AML variable strongly affects the economic convenience of the individual products. Considering the partially inelastic nature of AML costs, the size of the operation is equally fundamental in determining whether to initiate relationships with certain types of customers.

Keywords

• risk adjusted performance measures
• anti-money laundering
• activity based costing
• economic value added
• pricing