Manual Operational Risk Modelling and Management

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European legislators are completing the implementation of the previous version of the legislation and will continue the codification of the new one after that work is finished. For example, the final regulatory technical standards RTS on the detailed requirements of the advanced measurement approach AMA were officially published in July This document will become obsolete when the final provisions of Basel III regarding the SMA under Pillar 1 are transposed into the European legislation and become effective.

The SMA is expected to be effective as from Jan- uary 1, to allow time for legislators to transpose it and for institutions to prepare for its implementation and impact. Based on the ad-hoc study published by the EBA in December , capital requirements under the SMA are expected to increase on average by The capital impact of the changes is controlled by the output floor and the transition cap which apply on an aggregate basis for all risk types.

The final RWA for the aggregate of all risk types under Pillar 2 will need to gradually reach The Basel Committee on Banking Supervision BCBS started publishing documents related to operational risk already in , but it was not until that it published its first sound practice recommendations related to this risk type BCBS Operational risk appeared as a separate risk type with explicit capital requirement in the Basel II framework in The term is defined as:.

Operational Risk Model Management

This definition includes legal risk, but excludes strategic and reputational risk. The calculation under the BIA is based on standard financial indicators of the bank and could be calculated regardless of size or complexity. The RWA under the TSA and ASA is similarly simple to calculate, but quantitative and qualitative requirements regarding the risk management framework were attached to the more flexible and thus likely lower capital requirements.

Finally, the approval for using internal models AMA under Pillar 1, came with still more stringent requirements regarding the models, but also the risk management framework around it.

Analyze and manage operational risk

In the years since, large banking organizations have embraced the opportunity to benefit from capital requirement relief versus simpler approaches in exchange for more advanced internal operational risk processes. The implementation is being controlled by the internal auditor and the supervisor.

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  • The framework was intended to raise the awareness for and understanding of operational risk throughout the organization and it would continue to have a significant impact on the organizational culture if its implementation was taken seriously. Institutions with a sound operational risk framework were in a better position to develop credible plans for business continuity BCP and disaster recovery DRP.

    The crisis of highlighted the shortcomings of the Basel II framework, and regulators have taken action to strengthen the resilience of the sector related to operational risk exposures as well. Basel III: Operational risk in Banking

    The major concern was related to simpler approaches BIA, TSA, ASA which reflected lower operational risk exposure despite higher observed losses during the crisis, as these are based on the gross income of the bank as a proxy for operational risk exposure. Additionally, the use of the AMA often results in capital savings under the Basel framework.

    The OpRisk Lighthouse Model includes integrated parameters based on external loss data. The OpRisk Lighthouse Model produces an aggregate operational loss distribution, which is critical to calculating capital requirements.

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    • The OpRisk Lighthouse Model produces the following output:. Please contact Risk Lighthouse for licensing information. Choose a web site to get translated content where available and see local events and offers.

      Operational Risk

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      Analyze and manage operational risk

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