Measuring and Calculating Economic Operational Risk Capital

Anthony Peccia

This chapter illustrates how an advanced measurement approach (the AMA in BIS terminology) can be constructed that, based on the loss distribution approach (LDA), integrates internal losses, external losses and credible scenario analysis, and incorporates directly into the measurement process the state of the business and controls environments as determined through risk and control self-assessments (RCSAs), key risk indicators (KRIs) and audit assessments. Through this approach, there is no need for ad hoc and most often arbitrary qualitative adjustments. This approach, called the operational risk ratings approach, directly measures the risks identified in the RCSA, which then provides management with the insight into which controls to improve in order to achieve or maintain the desired level of operational risk.

Economic operational risk capital: what for?

The New Capital Accord (see BIS, 2004), commonly referred to as Basel II, has spawned a lot of interest in operational risk measurement and management. This interest has in turn spawned a variety of operational risk initiatives, ranging from qualitative self-assessments and various forms of operational risk data collection to