HypoVereinsbank First Major Bank to Implement OpVaR

LONDON--HypoVereinsbank, the second-largest bank in Germany, has become the first major bank to implement the Pricewaterhouse Coopers risk measurement tool OpVaR.

The late December announcement by PwC indicates that the fight for clients in the growing market for op risk software and services is hotting up.

It also signals that European banks have become more serious over the last year in their efforts to tackle operational risk.

So far, few other banks have publicly announced the installation of one of the new breed of op risk management tools, though European, US and some Japanese banks are known to be evaluating a range of data and risk management methodologies.

With the Y2K problem out of the way, operations and risk managers are turning their attention to improving operational efficiency and operational risk management.

OpVaR mixes actuarial techniques and a value-at-risk methodology to help banks estimate their exposure to operational risks.

Practitioners who have used OpVaR say its methodology helps link risk estimates based on analysis of internal bank operations -- the "bottom up" approach to risk profiling - to analysis of external loss statistics.

Used in this way, operational risk measurement tools can help banks to generate a "quick-and-dirty" figure for their firm-wide operational risk capital requirements. Most banks say this sort of educated guess is the best that they can hope to achieve within a short timeframe.

The calculations can be used to improve estimates of risk-adjusted returns that might otherwise ignore operational risks entirely.

PwC recently announced that it is hoping to organise a consortium of financial institutions to supply private internal loss data to the OpVaR database of external events. More data is likely to mean more reliable estimates.

The OpVaR tool also allows banks to calculate economic capital for operational risks incurred by individual business lines. The results can be used to help banks select the most cost effective way of mitigating op risks -- through mechanisms ranging from insurance to capital buffers.

Andre Horovitz, head of risk control at HypoVereinsbank, says that OpVaR has proved useful for risk management as well as risk measurement. He says that implementing the tool, "has increased awareness of operational risk around the bank and has created a culture more supportive of our risk mitigation efforts."

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