Measuring and Managing Operational Risk
Duration:
2 days
2 days
Location:
Prague, Mövenpick Hotel
Prague, Mövenpick Hotel
- Introduction to Operational Risk
- People Risk, Technology Risk, Legal Risk
- Model Risk, Accounting and Tax Risks
- Operational Risk in Basel II
- Approaches to Measuring Operational Risk
- Operational Risk and RAROC
- Managing Operational Risk
The purpose of this seminar is to give you a thorough introduction to operational risk and a good understanding of how the various types of operational risk can be measured and managed.
We will start with an overall definition of “Operational Risk” and will discuss why this type of risk is becoming a more important issue.
We will then take a closer look at the various types of risks that are categorized as operational risks, including people risk (fraud, unauthorized trading, mistakes), technology risk (including settlement risk), legal risk (i.e. when using swaps or credit derivatives), model risk, and accounting and tax risks.
Next, we will explain how operational risk can be quantified using “Basic Indicators”, “Value Chain Analysis”, “Principal-Agent Analysis” and more sophisticated, statistical techniques. We will also explain how measures for operational risk are brought into the calculation of risk capital and how capital is allocated optimally across business units.
After that, we will explain the role of operational risk in Basel II. We will explain how operational risk is quantified according to the proposal, and we will illustrate the possible impact on the capital ratios of banks. We will give illustrative examples of the “Basic Indicator Approach”, the “Standardized Approach” and the “Advanced Measurement Approach” (AMA).
Finally, we will present and discuss possible ways of managing operational risk, including “Business Process Reengineering”, using insurance, incentives, and sophisticated derivatives and structured products with “embedded” insurance features. We also discuss how operational risk management can be integrated into a comprehensive “Enterprise Risk Management” framework.
We will start with an overall definition of “Operational Risk” and will discuss why this type of risk is becoming a more important issue.
We will then take a closer look at the various types of risks that are categorized as operational risks, including people risk (fraud, unauthorized trading, mistakes), technology risk (including settlement risk), legal risk (i.e. when using swaps or credit derivatives), model risk, and accounting and tax risks.
Next, we will explain how operational risk can be quantified using “Basic Indicators”, “Value Chain Analysis”, “Principal-Agent Analysis” and more sophisticated, statistical techniques. We will also explain how measures for operational risk are brought into the calculation of risk capital and how capital is allocated optimally across business units.
After that, we will explain the role of operational risk in Basel II. We will explain how operational risk is quantified according to the proposal, and we will illustrate the possible impact on the capital ratios of banks. We will give illustrative examples of the “Basic Indicator Approach”, the “Standardized Approach” and the “Advanced Measurement Approach” (AMA).
Finally, we will present and discuss possible ways of managing operational risk, including “Business Process Reengineering”, using insurance, incentives, and sophisticated derivatives and structured products with “embedded” insurance features. We also discuss how operational risk management can be integrated into a comprehensive “Enterprise Risk Management” framework.
13.00 - 16.30 Quantifying Operational Risk
- Overview of Approaches to Measuring Operational Risk
- Bottom-up and top-down methods
- Risk profiling
- Value chain analysis
- Scorecard approaches
- Principal-agent analysis
- Basic Indicator Approach (Basel)
- Exposure indicator (EI)
- The “alpha” factor
- Example of calculating capital charge
- The Standardized Approach (Basel)
- Minimum standards for using the standardized approach
- Business lines and business line mapping
- The “beta” factors
- Example of calculating capital charge
- Case: Using Basic Indicator/Standardized Approach in “Small Bank”
- Small Exercises
Day Two
09.00 - 09.15 Brief recap
09.15 - 12.00 Quantifying Operational Risk (2)
- Advanced Measurement Approach (Basel)
- Characteristics and components of AMA
- Minimum requirements for using AMA
- Challenges and benefits of the AMA
- Quantifying Risk Using the AMA
- Operational loss data
- Internal/external
- Quantification methodologies
- Loss Distribution Approach (LDA)
- Value-at-Risk
- Qualitative risk assessment and key risk indicators
- Scorecards and early warning systems
- Operational loss data
- Required Disclosures after the AMA
- Summary: Comparing the Possible Impacts of Different Measurement Approaches (QIS)
Practical Implementations
- Practical Advices (how to build an Operational Risk database, etc.)
- Pitfalls and Possible Solutions
- Implementation of an Operational Risk Framework at “BigBank”
- Using AMA in “BigBank”
12.00 - 13.00 Lunch
13.00 - 16.30 Managing Operational Risk
- Sound Practices for Managing Operational Risk (Basel)
- Developing an appropriate risk management environment
- Identification, assessment, monitoring and Control/mitigation
- The role of supervisors
- The role of disclosure
- Risk Mitigation Techniques
- Insurance
- OP derivatives and “Act-of-God” instruments
- Settlement systems
- Managing Operational Risk under Pillar 2 in the Basel II Framework
Integrated Risk Management
- The COSO Integrated Framework for Managing Risk
- Building Consistent Operational Risk Management Systems
- Developing an Enterprise-Wide “Risk Culture”
- Integrating Basel II and MiFID Compliance
Summary, Evaluation and Termination of the Seminar
