Operational Risk Capital Models (2nd edition)
First published:
ISBN: 9781782724223
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Part I: Capture and Determination of the Four Data Elements
Introduction
Challenges of operational risk advanced capital models
Part I: Capture and Determination of the Four Data Elements
Collection of operational loss data: ILD and ED
Scenario analysis framework and BEICFs integration
Part II: General Framework for Operational Risk Capital Modelling
Loss data modelling: ILD and ED
Distributions for modelling operational risk capital
Scenario analysis modelling
Exposure-based approaches
BEICFs modelling and integration into the capital model
Hybrid model construction: Integration of ILD, ED and SA
Derivation of the joint distribution and capitalisation of operational risk
Backtesting, stress testing and sensitivity analysis
Regulatory approval report
Evolving from a plain vanilla to a state-of-the-art model
Part III: Use Test, Integrating Capital Results into the Institution’s Day-to-day Risk Management
Strategic and operational business planning and monitoring
Risk/reward evaluation of mitigation and control effectiveness
Appendix 1: Credibility theory
Appendix 2: Mathematical optimisation methods required for operational risk modelling and other risk mitigation processes
Business risk quantification
The results of an operational risk capital model are primarily dependent on the inputs provided to the modelling. This dependence is even higher than in other risk models, because, in the case of operational risk capital, inputs include significant portions of expert opinions and very diverse sources, and many inputs are internally generated by the institution.
According to the BCSG-AMA (the abbreviation used in this book for referring to the document issued by Basel Committee on Banking Supervision titled “Operational Risk – Supervisory Guidelines for Advanced Measurement Approaches”),11 This work bases its regulatory references on various Basel Committee documents. Nevertheless, we believe these references are perfectly applicable to other regulated industries, such as the insurance sector. In fact, regulatory frameworks across industries and jurisdictions share basic principles. We also believe that the operational risk principles defined in this work are usable for the modelling of operational risk even in non-financial industries such as energy and utilities. Indeed, most of the principles defined in the financial sector regulation can be used for the internal governance
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