The book presents a set of risk assessment methods which will be of use to risk managers and quantitative risk analysts for a variety of risk management purposes in unique scenarios. The reader is taken through the processes of risk assessment in view of the Basel Accord requirements, from the identification and evaluation of the calculation dataset, to scenario analysis and analysing insurance for operational risk. The calculation dataset is used for a robust operational loss modelling of capital at risk, for insurance contracts and their effects on individual loss events. The authors present techniques for parametric estimation and analytical methods to select appropriate statistical distributions for severity and frequency of loss classes to obtain VaR for individual business environments. There are also copula–based methods of calculation of overall capital. Finally, the authors present an analysis of insurance policies and models for calculating reputational risk, inextricably linked to operational risk, and a type of exposure which is increasingly important in view of recent large loss events at major banks gaining a great deal of media exposure.
This title presents useful ways of approaching operational risk management to meet the requirements of the Basel II Accord, while the authors flexible approach (combining LDA and SBA methods) makes its risk analysis meaningful to different types and sizes of financial institution. The title will be valuable to quantitative analysts, quantitative developers and risk managers trying to digest and integrate the new Basel requirements.
1 The Development of ORM in UniCredit Group.
1.1 A brief history of a fast–growing group.
1.2 Creating a new function.
1.3 Developing the new control system.
1.4 Challenges in the early stages.
1.5 Methodology to measure operational risk.
1.6 Training and internal communication focus.
1.7 International regulatory challenges.
1.8 Reputational risk management.
2 The Calculation Dataset.
2.2 Rules of thumb.
2.3 Internal loss data.
2.3.1 Business line mapping.
2.3.2 Event type classifications.
2.3.3 Data quality analysis.
2.3.4 Special cases.
2.4 Minimum loss threshold.
2.5 External data.
2.5.1 Public or external data sources.
2.5.2 Consortium data.
2.5.3 Scenario data.
2.6 Business environment and internal control factors.
2.8 Insurance information.
2.9 Scaling data.
2.10 The Unicredit Group Operational Risk database Evolution.
2.11 Final considerations.
3 Loss Distribution Approaches.
3.1 Calculation dataset building.
3.1.1 Internal calculation dataset.
3.1.2 External calculation dataset.
3.1.3 Scenario–generated calculation dataset.
3.1.4 Risk indicators calculation dataset.
3.2 General LDA framework.
3.3 Operational risk classes.
3.3.1 Identically distributed risk classes.
3.3.2 Inflation adjustment.
3.3.3 Data independence.
3.4 Parametric estimation and goodness–of–fit Techniques.
3.4.1 Severity distributions.
3.4.2 Graphical methods.
3.4.3 Analytical methods.
3.4.4 Frequency distributions.
3.5 Applying extreme value theory.
3.6 g–and–h distribution theory.
3.7 Calculating operational capital at risk.
3.7.1 Loss severity distribution.
3.7.2 Loss frequency distribution.
3.7.3 Annual loss distribution.
3.7.4 Single class capital at risk.
3.8 Insurance modeling.
3.8.1 Appropriate haircuts reflecting the policy s declining residual term.
3.8.2 Payment uncertainty.
3.8.3 Counterparty risk.
3.8.4 Application of insurance.
3.9 Adjustment for risk indicators.
3.10 Operational risk classes aggregation.
3.10.1 Copulae functions.
3.10.2 Elliptical copulae.
3.10.3 Archimedean copulae.
3.10.4 Choice of copula.
3.10.5 Correlation coefficients.
3.11 The closed–form approximation for OpVaR.
3.11.1 Effect of the minimum threshold on capital at risk.
3.12 Confidence band for capital at risk.
3.13 Stress testing.
3.14 Loss data minimum threshold setting.
3.15 Empirical application on Algo OpData.
3.15.1 Descriptive statistics.
3.15.2 Autocorrelation analysis.
3.15.3 Capital at risk estimates using parametric models.
3.15.4 Capital at risk estimates using EVT.
3.15.5 Capital at risk estimates using the g–and–h distribution.
3.15.6 Capital at risk estimates considering Correlation.
3.16 Regulatory capital requirement.
3.16.1 The consolidated capital requirement.
3.16.2 The individual capital requirement.
3.17 Economic capital requirement.
3.18 Integration of operational risk in the budgeting process.
4 Analyzing Insurance Policies.
4.1 Insurance management and risk transfer.
4.2 Qualifying criteria in the Basel 2 capital Framework.
4.2.1 Rating of the insurance company.
4.2.2 Duration and residual term of the insurance contract.
4.2.3 Policy termination requisites.
4.2.4 Claims reimbursement uncertainty and ineffective coverage.
4.3 A practical application to traditional insurance.
4.3.1 Insurance policies to cover financial institutions operational risks.
4.3.2 Operational event types and available insurance coverage.
5 Managing Reputational Risk.
5.1 Introducing reputational risk.
5.2 A financial institution s reputational risk exposure.
5.3 Managing reputational risk: a matter of policy.
5.4 Reputational risk measurement.
5.4.1 Reputational risk as a function of share price volatility.
5.4.2 Measuring reputational risk using scenarios.
5.4.3 Scoring–card–based models for reputational risk assessment.
5.5 A recent example of reputational event.
5.5.1 A description of the event.
5.5.3 How the fake trading occurred.
5.5.4 The discovery and first reactions.
5.5.5 Measures planned and taken.
5.5.6 Immediate consequences for SocGen.
5.5.7 Reputational issues and comments.
5.5.8 The lessons learned what can we do to avoid being next?
5.5.9 Psychological, soft factors.
5.5.10 Control instruments.
5.5.11 Managing data and signals.