OpRisk Awards 2016
On March 4, the Basel Committee on Banking Supervision unveiled substantial revisions to the operational risk capital framework, centred around a new Standardised Measurement Approach (SMA), designed to generate risk-sensitive capital levels that are more consistent across banks and jurisdictions.
The proposals would remove the internal model-based approach altogether, but banks will still need sophisticated modelling capabilities to calculate their exposures. That's good news for The Analytics Boutique, a niche technology vendor focused on advanced operational risk metrics.
"The SMA itself is a very simple calculation, but it is likely that many supervisors will require banks, under Pillar 2 of the framework, to use advanced risk-sensitive models to clearly identify their largest and most dangerous exposures, so risk mitigation can be directed to those points," says Rafael Cavestany, founder and director of The Analytics Boutique.
A fully owned subsidiary of London-based consulting firm True North Partners, The Analytics Boutique has been operational since early 2012, and its product, OpCapital Analytics, has been implemented at 10 institutions, including banks and insurance companies. Led by Cavestany and innovation director Daniel Rodriguez, The Analytics Boutique benefits from its links with True North Partners, as many firms will access the consultancy first before tapping the technology.
In one instance, a large global bank needed to build a hybrid operational risk model very quickly using internal and external data and scenario analysis to meet the requirements of its regulator. Using OpCapital Analytics as its modelling tool, the bank was able to complete the project in only eight weeks in mid-2015.
Our product is tailored to be more user-friendly, so the institution can really own the analytics process
Rafael Cavestany, The Analytics Boutique
Cavestany estimates that building a model of such a scale and complexity could typically take up to 12 months, but by installing the system in the bank's own IT environment and training its staff to use it, The Analytics Boutique was able to facilitate a much quicker process.
"Many vendors provide a simple analytics tool with limited functionality and it is left up to the client to do all of the coding necessary to build an appropriate model, which can be very time-consuming and prone to errors. Our product is tailored to be more user-friendly, so the institution can really own the analytics process," Cavestany explains.
The removal of internal models from the operational risk capital framework will certainly have an impact on the way OpCapital Analytics is used in the future. But practitioners argue that banks will continue to find value in modelling their op risk exposures – in which case, OpCapital Analytics may continue to be a popular tool. The product is designed to be accessible to non-specialists, and has also been built to meet the requirements of a range of modelling and stress-testing regimes.
"In many banks we find it is only a small group of people with mathematical coding skills that can run the models, which introduces a human dependency that can be a risk if those people leave. Many supervisors now require banks to avoid black boxes and make sure models are well understood, so there is clearly a need for more accessible, understandable and transparent solutions in this area," says Cavestany.
The week on Risk.net, December 2–8, 2017Receive this by email