Operational Risk Capital Models (2nd edition)
First published:
ISBN: 9781782724223
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Introduction
Introduction
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
The second edition of this book was being written as the world was hit by a pandemic disease that severely struck society and the global economy in a way that will possibly change how we live forever. The pandemic found even the most advanced societies highly unprepared despite the long-time warnings by the World Heath Organisation (WHO) and world leaders such as Bill Gates. Even pre-pandemic, regulators were developing new guidance for financial organisations to define plausible responses to severe impact scenarios for operational disruptions of critical business processes.
In fact, the first edition of this book was written in 2015 while the world economy was still recovering from the largest economic crisis since the Great Depression. Many of the causes of the 2008 crisis can be traced to consecutive operational failures (Robertson, 2011), including mortgage fraud, model errors, negligent underwriting standards and failed due diligence combined with loosely implemented innovation trends in finance. Mortgage originators, mortgage bundlers, credit rating agencies, asset managers, investors and, ultimately, regulatory agencies were responsible for many of these operational
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