The Past, the Present and the Future of Operational Risk Modelling

Lourenco Miranda

The objective of this chapter is to discuss the origins of the modelling activities in the operational risk arena and analyse where it stands today, and by doing so we will be able to understand where it should be positioned in the future.

the modelling of operational risk has changed since the late 1990s. It started as an “all-hands-on-deck” situation in the late 1990s and early 2000s to solve the problem of estimating regulatory capital for Basel. Finding the right solution was the Holy Grail for all the operational risk modellers, including the author of this chapter. This quest of a robust solution lasted almost 20 years and the conclusion was, as frustrating as this is, that there is no robust approach agreed within the industry.

In 2014, the Basel Committee had the same conclusion leading to the exclusion of operational risk from “Advanced Approaches” status. After that fact, the operational risk quants on call had to redefine their jobs. They had to rediscover themselves and what value they could bring to the firm and to the industry. We will show that there is still a lot to be done and it is true that, once one door shuts, many others will open. The question now is to