Round-up of recent publications

• Advances in Operational Risk -- Firm-wide Issues for Financial Institutions, published by Risk Waters Group in association with Andersen. ISBN: 1 899 332 839.

A new vision for operational risk management is emerging, says the introduction to this 16-chapter colloquium. Each chapter is contributed by a different author or authors, all leading academics or practitioners.

The new vision is one in which managers seek to add value to their institution by managing op risk across all functions, geographies and units of an organisation. It is linked to the relationship of op risk to market and credit risk and, ultimately, the concept should help improve shareholder value through operating efficiencies and loss mitigation. Financial firms will also use op risk management to optimise their use of capital.

The book is divided into three sections.

The first section, ‘Managing Operational Risk’, lays out the needs and practical considerations relating to dealing with op risk management, and looks at the applicability of real options in acquisitions.

The second section, ‘Risk Analysis, Identification and Modelling’, takes as its starting point the development of an op risk management framework and goes on to tackle the loss data issue. This section discusses some of the technical aspects of theories and models currently under development. It suggests there is no single solution, but rather a collection of best practices that the industry is developing.

The last section, ‘New Regulatory Framework and Compliance’, gives a regulator’s view of op risk management and industry-wide compliance, and shows how regulatory compliance relates to reputational risk.

The publisher, Risk Waters Group, is also the publisher of Operational Risk newsletter.

• Operational Risk -- Measurement and Modelling, by Jack L King, published by John Wiley and Sons. ISBN: 0 471 85209 0.

The author of this book seeks to provide a basis for understanding operational risk by focusing on its measurement and modelling at a time when there is no consensus on a definition of this type of risk.

And although regulatory rulings are pending from global regulators in the shape of the Basle Committee on Banking Supervision, "no clear understanding of operational risk management for financial institutions has emerged".

But operational risk represents the next frontier in improving shareholder value by reducing the amount of risk to the earnings of the firm, King argues.

Financial firms have implemented sophisticated risk management systems for market and credit risk. But they now realise that a major source of earnings volatility is not the way a firm finances its business, but rather the way it operates its business.

The book has four sections. The first provides an introduction to op risk. The second looks at measuring op risk with reference to delta and extreme value theory (EVT). The third part discusses modelling op risk, and the fourth reviews the mathematical foundations with reference to error propagation, EVT and Bayesian methods.

• Mastering Risk Volume 2: Applications. Executive editor: Carol Alexander, published by Financial Times Prentice Hall. ISBN: 0 273 65436 5.

This book is generally written at a more advanced level than its predecessor, Mastering Risk Volume 1: Concepts, which aimed to give a comprehensive overview.

Volume 2 covers market, credit and operational risk management for financial institutions. The four-chapter section on op risk presents some of the recent advances "in the very difficult area of measuring and managing operational risks".

The first chapter, by Marcelo Cruz, looks at the pricing of operational-risk linked bonds using actuarial-based techniques from extreme value theory.

Tony Peccia, in the second chapter, shows how to design a framework for measuring and managing op risk in a large investment bank.

Alexander herself introduces Bayesian statistics in the third chapter, and reviews their applications for op risk measurement and measurement.

In the final chapter, David Murphy assesses the regulatory developments for op risk capital requirements in the Basle II bank capital accord proposed by the Basle Committee on Banking Supervision.