In December 2017, the Basel Committee published the final version of its standardized measurement approach (SMA) methodology, which will replace the approaches set out in Basel II (ie, the simpler standardized approaches and advanced measurement approach (AMA) that allowed use of internal models) from January 1, 2022. Independently of the Basel III rules, in order to manage and mitigate risks, they still need to be measurable by anyone. The operational risk industry needs to keep that in mind.
While the purpose of the now defunct AMA was to find out the level of regulatory capital to protect a firm against operational risks, we still can – and should – use models to estimate operational risk economic capital. Without these, the task of managing and mitigating capital would be incredibly difficult. These internal models are now unshackled from regulatory requirements and can be optimized for managing the daily risks to which financial institutions are exposed. In addition, operational risk models can and should be used for stress tests and Comprehensive Capital Analysis and Review (CCAR).
The Journal of Operational Risk also welcomes papers on nonfinancial risks as well as topics including, but not limited to, the following.
- The modeling and management of operational risk.
- Recent advances in techniques used to model operational risk, eg, copulas, correlation, aggregate loss distributions, Bayesian methods and extreme value theory.
- The pricing and hedging of operational risk and/or any risk transfer techniques.
- Data modeling external loss data, business control factors and scenario analysis.
- Models used to aggregate different types of data.
- Causal models that link key risk indicators and macroeconomic factors to operational losses.
- Regulatory issues, such as Basel II or any other local regulatory issue.
- Enterprise risk management.
- Cyber risk.
- Big data.
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This paper proposes an approach, called the loss distribution approach with segmented dependence (LDA-SD), which can model the different dependencies of HFLI and LFHI losses in the framework of LDA.
In this paper, the authors provide a comprehensive review of the different approaches developed to model operational risk, specifically focusing on the actuarial approach.
Global perspectives on operational risk management and practice: a survey by the Institute of Operational Risk (IOR) and the Center for Financial Professionals (CeFPro)
This paper presents survey results which represent comprehensive perspectives on operational risk practice, obtained from practitioners in a wide range of countries and sectors.
This paper evaluates the operational risk capital requirements of large US banks to determine whether they are forward looking, sensitive to banks’ current exposures and designed to allow for risk mitigation.
In this paper, the authors look at B-tests: methods by which it is possible to identify internal fraud among employees and partners of the bank at an early stage.
This paper proposes an alternative framework for setting banks’ operational risk capital, which allows for forward-looking assessments and limits gaming opportunities by relying on an incentive-compatible mechanism.
In this paper, the authors apply a dynamic extreme value theory (EVT) model based on a nonhomogeneous Poisson process incorporating covariates to estimate frequency, severity and risk measures for operational risk.
The aim of this paper is to propose a model that describes the integration of knowledge-based risks (via the processes of knowledge-based risk identification, analysis, evaluation and education) and knowledge-based risk repositories to support risk…
This paper is a historical case study of the GAS scandal and is the first to analyze it from the perspective of operational risk.
In this paper, the authors present an alternative quantification technique, so-called exposure-based operational risk (EBOR) models, which aim to replace historical severity curves by measures of current exposures and use event frequencies based on…
In this paper, the authors present a way to address multivariate distortion risk measures and give some examples of distortion functions and distributions where the final expression has a closed form.
In this paper, the author constructs a capital model for operational risk based on the observation that operational losses can, under a certain dimensional transformation, converge into a single, universal distribution.
In this paper, the author presents a simple probabilistic model for aggregating very large losses into a loss collection.
Bridging networks, systems and controls frameworks for cybersecurity curriculums and standards development
This paper proposes a risk management framework designed to facilitate the alignment, integration and streamlining of professional practice standards and computer science/cybersecurity educational curriculums by bridging NPNATFs, SNIFs and RMCPFs.
In this paper, the authors study tail dependence by defining the conditions required for all the methods used to perform and to quantify their efficiency and accuracy.
In this paper, the authors propose a method of allocating operational risk regulatory capital using a closed-form Shapley method, applicable to a large number of business units (BUs).
In this paper, the authors discuss the hazard generated by OpRisk driven by natural and human-made disasters, and argue the position of the LDA as the most-fitted statistical approach to deal with it.
Standardized measurement approach extension to integrate insurance deduction into operational risk capital requirement
The SMA proposed in BCBS (2016) presents several issues: in particular, its two components are not sufficient to discriminate banking institutions by risk profile, thus penalizing the more virtuous ones. This paper describes a possible solution to extend…
In this paper, the authors address the issue of an efficient people-risk capital allocation for financial institutions.
A note on the standard measurement approach versus the loss distribution approach–advanced measurement approach: the dawning of a new regulation
This paper presents a nonexhaustive review of the literature on operational risk quantification under a combination of the loss distribution approach model – the most commonly used of the AMA models – and extreme value theory.