Operational Risk Modelling and Management

Taking into account the standards of the Basel Accord, Operational Risk Modelling and Management presents a simulation model for generating the loss distribution of operational risk. It also examines a multitude of management issues that must be considered when adjusting the quantitative results of a comprehensive model. The book emphasizes techniques that can be understood and applied by practitioners. In the quantitative portions of the text, the author supplies key concepts and definitions without stating theorems or delving into mathematical proofs. He also offers references for readers looking for further background information. In addition, the book includes a Monte Carlo simulation of risk capital in the form of a run-through example of risk calculations based on data from a quantitative impact study. Since the computations are too complicated for a scripting language, a prototypical software program can be downloaded from www.garrulus.com Helping you navigate the tricky world of risk calculation and management, this book presents two main building blocks for determining how much capital needs to be reserved for operational risk. It employs the loss distribution approach as a model for calculating the risk capital figure and explains risk mitigation through management and management’s actuations.

Introduction to Operational Risk Why Regulate Banks? Additional Supervision The Basel Regulatory Effort Risk and CapitalWhat Is Operational Risk? Economic Capital for Operational Risk Operational Risk under Basel 2Role of Insurance Regulation after the Crisis The Problem ContextGeneral Remarks The Data ProblemThe Dependency ProblemThe Insurance Problem The Mapping Problem The Management Problem Strategic Risks of a Bank AMA Standards The Knowledge Problem Probability, Causality and Other Primitives The Modelling ApproachSimulation and the Monte Carlo Method General Model Structure Data Requirements Data Modelling and DistributionsRun-Through Example: Quantitative Impact Study DataCorrelation of LossesRisk Measures and AllocationInsurance Modelling and MitigationMapping Events to Insurance PoliciesMapping Events to Lines of Business Calculating the Economic CapitalResults of the Run-Through ExampleSummary and Conclusion Managing Operational Risk Management and OrganisationEnvironmentCultureOperational Risk Framework Operational Risk Structure Operational Risk ProcessBusiness Environment and Internal Control FactorsScenario Analysis Optimising the Insurance ProgrammeAudit, Reporting and Disclosure of Operational RiskRisk Management versus Internal Control Summary and Conclusion Conclusions Appendix Bibliography Index

Claudio Franzetti is the chief risk officer of Swiss Export Risk Insurance (SERV) in Zurich and president of Garrulus Enterprise Ltd. He has previously worked at Aon Resolution AG, Deutsche Bank, Swiss Re, and Iris AG.