Journal of Operational Risk

An alternative approach for the operational risk assessment of a new product

Andrea Giacchero, Jacopo Moretti, Francesco Cesarone and Fabio Tardella

  • Assessment of a new product using an ad-hoc checklist and the Analytic Hierarchy Process approach.
  • A new procedure for ranking operational risk events.
  • Analysis of the relationship between the total cost of investments and the exposure mitigation.

The risk assessment of a new product is one of the most critical activities performed by the operational risk management of a company operating in the financial sector. There are few reference points for the operational risk management to assess the riskiness of a new product, due both to the lack of operational loss data and to the inexperience of the process owners in handling the new operation. To overcome these two limitations, we propose a methodological operational risk framework to identify and prioritize the most dangerous operational risk events with respect to the introduction of a new product in a financial institution. The methodology starts with the use of a checklist based on risk factors (causes) to assess the operational riskiness of a new product before its launch. Then, after the launch and with particular reference to the management of the new product, we use the analytic hierarchy process approach to prioritize operational risk events, and the “80/20 rule” to allocate them to appropriate risk rating classes. Finally, we develop two optimization models to minimize the total cost of investments required to cover all the important risks, and to study the relationship between the total cost of investments and the exposure coverage.

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