Operational Risk Capital Models (2nd edition)
First published:
ISBN: 9781782724223
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Collection of operational loss data: ILD and ED
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
This chapter will examine the key considerations around operational loss data, both internal loss data (ILD) and external loss data (ED), the first two data elements of an operational risk capital model. It starts with discussion of operational loss and its key considerations, and the need for collection completeness and consistency with accounting. Finally, we will define an understanding of ED, discuss the ED available sources and introduce the ED uses.
TOWARDS A COMMON UNDERSTANDING OF OPERATIONAL LOSS
What are operational losses?
Defining operational risk is an important first step in developing a common understanding of operational loss. Conceptually speaking, operational risk has evolved steadily over time (see Figure 2.1). Recognising the growing impact of operational risk on the long-term health of organisations, the Basel II accords moved away from a classification of operational risk as simply all “other risk” not subsumed under the categories of market or credit risk, and towards a specific definition – “The risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events” (BIS 2001, section II
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