DEPARTMENT OF FINANCE, RISK MANAGEMENT AND BANKING
OPERATIONAL RISK MANAGEMENT RSK4801
Topic 3: Operational Risk Management Modelling
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RSK4801/1/2012 - 2015
TOPIC 3: OPERATIONAL RISK MANAGEMENT MODELLING AIM The aim of this topic is to provide students with an overview of operational risk modelling as part of the process to quantify operational risk, but does not cover the mathematically development of models and provide students with an overview of the stress tests and scenario analysis.
LEARNING OUTCOMES At the end of this topic, the student will be able to: motivate the need for regulatory capital and discuss the different approaches used in the banking industry to calculate regulatory operational risk capital; analyse and discuss the limitations and problems experienced with the calculation of operational risk capital and discuss the benefits of capital modelling; differentiate between stress tests and scenarios; discuss the principles for the governance of stress tests and scenarios; and apply stress tests and scenarios to operational risk data and develop practical scenarios.
TOPIC CONTENT Study Unit 8: Modelling Study Unit 9: Stress tests and scenarios
OVERVIEW The quantification of operational risk forms an important component of the operational risk management framework, although the modelling of operational risk is challenged by the broad nature of operational risk. To compensate for the limitations organisations perform stress tests and scenario analysis to understand its impact and possible mitigating strategies.
STUDY UNIT 8: MODELLING
CONTENTS Aim Key concepts Learning outcomes Learning material Assessment Summary
AIM The aim of this study unit is to provide students with an overview of operational risk modelling and does not cover the mathematically development of models.
KEY CONCEPTS Regulatory capital Basic indicator approach Standardised approach Advanced measurement approach Operational value at risk
LEARNING OUTCOMES Students must be able to: Explain the need for regulatory capital and discuss the different approaches used in the banking industry to calculate regulatory operational risk capital; and Analyse and discuss the limitations and problems experienced with the calculation of operational risk capital and discuss the benefits of capital modelling.
LEARNING MATERIAL 8.1. The prescribed learning material
This study unit is based on Chapter 8 of the prescribed book. 8.2. Introduction
Banks were required to calculate more sophisticated operational risk capital charges with the implementation of Basel II. The motivation was that regulators identified the need that banks should hold sufficient operational risk capital as the industry had experienced significant operational risk events, such as Barings Bank, and although banks were required to hold regulatory capital for market and credit risk, no such requirement existed specifically for operational risk.
There was general concern on the amount of capital that should suffice as the industry realised that operational risk is very broad by nature and no precedent or guidelines existed for the calculation of operational risk. There was also agreement that a flat charge of 20 – 12% of income was arbitrary and not risk based.
Basel II introduced three approaches to calculate the operational risk regulatory capital...
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