Operational Risk Capital Models (2nd edition)
First published:
ISBN: 9781782724223
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Strategic and operational business planning and monitoring
Rafael Cavestany, Lutz Baumgarten and Brenda Boultwood
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
We now look at the embedding of the risk profile, calculated as presented in Part II, into the strategic and operational business planning and its monitoring. We have structured this chapter into the following sections:
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“Integrating the operational risk profile into the strategic and operational planning”: In this section, we examine the means and key considerations when integrating the operational risk profile into the strategic and operational business planning process.
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Integrating capital results into the GRC risk reporting”: Here, we look at the integration of the capital results into the overall reporting of governance, risk and compliance (GRC).
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ORA for monitoring the strategic and business plan”: This section introduces a framework for operational risk appetite (ORA) and its use in the monitoring of the operational risk profile in accordance with the business plan.
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INTEGRATING THE OPERATIONAL RISK PROFILE INTO THE STRATEGIC AND OPERATIONAL PLANNING1
Since the onset of the financial crisis in 2007, the industry has moved in the direction of a more integrated (or holistic) approach towards planning. This development was
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