Collection of operational loss data: ILD and ED

Brenda Boultwood

This chapter will examine the key considerations around operational loss data, both internal loss data (ILD) and external loss data (ED), the first two data elements of an operational risk capital model. It starts with discussion of operational loss and its key considerations, and the need for collection completeness and consistency with accounting. Finally, we will define an understanding of ED, discuss the ED available sources and introduce the ED uses.

TOWARDS A COMMON UNDERSTANDING OF OPERATIONAL LOSS

What are operational losses?

Defining operational risk is an important first step in developing a common understanding of operational loss. Conceptually speaking, operational risk has evolved steadily over time (see Figure 2.1). Recognising the growing impact of operational risk on the long-term health of organisations, the Basel II accords moved away from a classification of operational risk as simply all “other risk” not subsumed under the categories of market or credit risk, and towards a specific definition – “The risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events” (BIS 2001, section II

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