Operational Risk Capital Models (2nd edition)
First published:
ISBN: 9781782724223
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Risk/reward evaluation of mitigation and control effectiveness
Rafael Cavestany and Javier Martinez Moguerza
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
In Chapter 14, we introduced the integration of the operational risk profile into the business plan and the monitoring of the plan execution using an operational risk appetite framework. Here, we examine examples of the evaluation of controls and mitigation plans that have an impact on the risk profile, and which can be used for measuring the consumption of, and/or adjusting the risk limits defined by, the operational risk appetite (ORA) framework.
The impact of the mitigation and controls on the risk levels, ORA, limits, and so on, should be evaluated as they change the risk profile of the institution, which is measured by the operational risk capital model. Far too often, the operational risk analysis is single-sided, evaluating only the threats and potential losses. In this chapter we examine various examples of joint analysis of the risk impacts and the benefits of their mitigation.
The chapter is structured into the following sections describing the risk/reward evaluation of the mitigation actions that can be included in an operational risk business plan.
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“Insurance programmes: Evaluation of their mitigation impact”.
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Risk/reward evaluation of
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