Panellists at the OpRisk Europe conference in London argued that key strategic risks can only be addressed by scenario analysis Scenario analysis still has a key role to play in operational risk modelling under the advanced measurement approach (AMA) to operational risk, the OpRisk Europe conference in London heard last week. Developing an AMA model without using scenario analysis – which is the case in the US where banks have to use the loss distribution approach only – could lead to events not being captured and therefore models being inaccurate. Andrew Sheen, head of operational risk use test, AMA, group operational risk at HSBC, told delegates that scenarios have a great deal to add to operational risk modelling and that without them, there may be certain operational risk events that can't be captured: "They are forward-looking and if I think of the size of fines that are coming out in the US – around money laundering for example – if that's not captured in your loss data and if you aren't a member of the Operational Riskdata Exchange Association (ORX) and therefore not using ORX for external data, then how do you capture that within your model if you don't use scenarios? So for me, scenarios are an essential part of any AMA model." He added that the AMA is about risk management as well as risk measurement: "If you don't understand those sorts of risk and if you're not seriously running a scenario programme, how do you know what the risks are that you should be managing as you go forward? Personally I think scenarios have a key role to play in modelling operational risk." Guenther Helbok, head of operational and reputational risk at Bank Austria, told delegates that one of the key challenges with scenario analysis is that the scenarios will always be subjective. He pointed out, though, that there are certain areas where scenarios are the only way to measure operational risk within the AMA model. "In outsourcing risk and IT risk, scenarios are the only real assessment that we can do. These are two areas where internal data or external data will only get us to a certain point. These are the areas where scenarios are the forward-looking element to include." Scenarios also have to play a role in certain areas where a bank has decided to change a business model, Helbok explained. For example, if a bank wants to move away from derivatives business – "even if they may have had a large exposure in this area in the past, scenarios are the way to understand this forward-looking risk perspective, which may be lower than that which the bank has experienced in the past". Giorgio Spriano, head of operational risk management at Intesa Sanpaolo Group, told delegates that five years ago, being an AMA bank provided the organisation with some sort of advantage, but now more was needed. "It is also quite clear that alone, it is not sufficient," he said. "Only five years ago the advantage came in particular in terms of capital optimisation and a better and more flexible way to embed our systems within the bank. Now it is a first step but it is not sufficient on its own. We see that many other challenges have arisen." One of these is that banks operating in several countries will deal with a regulatory college made up of several national regulators, Spriano explained. This means that the AMA framework has to be flexible because the bank has moved from one national regulator to several. There is also the creation of the European Banking Authority (EBA) to think about, delegates heard. "The college framework is not particularly efficient – we often have to have a local discussion with local regulators. We also have a new important player, the EBA, and certainly being AMA, we are required by them to provide more and more additional information. In saying that, I think the AMA is still an advantage for us."...
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