This is a technical guide on how to model operational risk, with practical advice on how to set up an AMA programme that supports the modelling and quantification goals of a financial institution. The book focuses on practical solutions to modelling issues. It helps the reader set up a strong programme with quantification in mind, providing good quality information for modelling, in order to deliver the numbers needed for regulatory approval, and deliver value to their business lines. It presents many complex topics in a highly accessible manner. Five comprehensive sections guide the reader through the following key topics: the AMA framework - outlines a general approach to constructing an advanced measurement approach framework within a bank - the basis upon which any op risk model is built. It provides do's and don'ts as well as step-by step guidance on how best to achieve the goals of an op risk programme. It covers areas, such as data selection, granularity, correlation, and diversification.
Modelling basics - covers the fundamentals of operational risk modelling with discussion of general concepts, a study of Citigroup's own approach, as well as analysis of the main mathematical models regularly used to analyse loss data. Modelling challenges - shows you how models can be adjusted to overcome limitations in the underlying data. It includes practical guidance on loss data capture, the effect of data gaps on parameter estimates, expected and unexpected loss calculations and the use of extreme value theory to help mitigate some of the data problems associated with operational risk modelling. These complex topics are presented in an accessible manner, with plenty of thorough explanation to help digest and implement the content. Alternative modelling approaches - this section gives a general framework for thinking about qualitative elements and their role in modelling - including scenario analysis, key risk indicators, and how to overcome the challenges in the modelling of less tangible risks, such as technology risk.
Comparative views of implementation - to help gain a broader understanding of how op risk practitioners around the world are implementing their op risk solutions - the final section contains an overview of an op risk framework at a US bank, plus implementation studies from Spain and Germany. The German study unveils the results of a major industry survey, outlining "real world" practices in financial services firms, including the strengths and shortcomings of firms' approaches to solving key op risk challenges.
Ellen Davis is the editor of Operational Risk and Compliance magazine and BaselAlert.com, based in London. Previously, she was an editor on Risk magazine, and the editor of Asia Risk magazine, based in Hong Kong. She originally hails from New York City, where she had a long freelance career during which her work appeared in Treasury & Risk Management, Global Finance, BusinessWeek, CFO magazine, and a number of other financial publications. She holds a BA from Wellesley College and an MBA from New York University.
SECTION 1: THE AMA FRAMEWORK 1. The Advanced Measurement Approach: Getting it Started Jeremy Quick 2. Practical Decisions to Successfully Model Operational Risk Capital Michael Haubenstock and Jeff Hause SECTION 2: MODELLING BASICS 3. Operational Risk Modelling: Where do we go from here? Rudi DeKoker 4. Operational Risk Economic Capital Measurement: Mathematical Models for Analyzing Loss Data Gene Alvarez SECTION 3: MODELLING CHALLENGES 5. Breaking Ground on the Loss Data Challenge: Wachovia's Approach to Loss Data Capture and Validation Dee Harris and Tom Longstroth 6. Estimating the Parameters in the Loss Distribution Approach: How can we deal with Truncated Data? Marco Bee 7. Treatment of Incomplete Data in the Field of Operational Risk: The Effects on Parameter Estimates, EL and UL Figures Marco Moscadelli , Anna Chernobai , and Svetlozar Rachev 8. Test of Extreme Value Theory Applied to Operational Risk Data Giulio Mignola and Robert Ugoccioni SECTION 4: ALTERNATIVE MODELLING APPROACHES 9. Scenario Analysis in Operational Risk Management Sergio Scandizzo 10. Key Risk Indicators: Their Role in Operational Risk Management and Measurement Jonathan Davies , Mike Finlay , Tara Lenaghen and Duncan Wilson 11. Quantifying the Operational Risks of Technology Eric Holmquist SECTION 5: COMPARATIVE VIEWS OF IMPLEMENTATION 12. Operational Risk: Some Issues in Basel II AMA Implementation in US Financial Institutions Vanada Rao and Ashish Dev 13. AMA Implementation in Germany: Results of BaFIN's and Bundebank's Industry Survey Patrik Muchmuller, Marcus Haas, Bernd Rummel Karsten Stickelmann 14. Operational Risk Management in Financial Institutions: Some Empirical Evidence from Spain Ana Fernandez Laviada