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Measuring and Managing Operational Risk

Duration: 3 days
  • Introduction to Operational Risk
  • Operational Risk Events
  • Operational Risk in Basel III
  • Scorecards and Principal Agent Analysis
  • Scenario Analysis and Stress Testing
  • Key-Risk indicators and Self-Assessment
  • Estimating the Loss Distribution Function
  • Monte Carlo Simulation and Loss Distributions
  • Financing and Transferring OP Risk
  • Regulatory and Economic Capital Assessment and Allocation
The objective 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 III. 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.

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Introduction to Operational Risk

  • What is “Operational Risk“?
  • Basel Definition of Operational Risk
  • Regulatory Treatment of Operational Risk

Closer Look at Operational Risk Events

  • Overview of Types of Operational Risk
  • Internal Fraud
  • External Fraud
  • Employment Practices and Workplace Safety
  • Clients, Products and Business Practices
    • Legal risk
    • The impact of MiFID
  • Damage to Physical Assets
  • Business Disruption and System Failures
  • Execution, Delivery and Process Management
    • Settlement risk
  • Landmark Operational Risk Cases
    • Barings, BCCI, World Trade Center, Allied Irish, KfW

12.00 - 13.00 Lunch

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
  • Case: Using the Basic Indicator Approach to quantify OR in “Small Bank”
  • Small Exercises

Day Two

09.00 - 09.15 Brief recap

09.15 - 12.00 Quantifying Operational Risk (2)

  • 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 the Standardized Approach to quantify OR in “Small Bank”
  • Advanced Measurement Approach (Basel)
    • Characteristics and components of AMA
    • Minimum requirements for using AMA
    • Challenges and benefits of the AMA

12.00 - 13.00 Lunch

13.00 - 16.30 Quantifying Operational Risk (3)

  • Quantifying Operational Risk Using the AMA
    • Operational loss data
    • Building the OP risk database
    • Quantification methodologies
      • Loss Distribution Approach (LDA)
      • Value-at-Risk
      • Using Monte Carlo simulation
    • Qualitative risk assessment and key risk indicators
      • Scorecards and early warning systems
      • Self-assessment programs
  • Exercises

Day Three

09.00 - 09.15 Brief recap

09.15 - 12.00 Validating OR Framework and Disclosures

  • OP Risk Framework Validation
    • Logic check for overall OR framework and framework elements
  • Required Disclosures after the AMA
  • Summary: Comparing the Possible Impacts of Different Measurement Approaches
  • Exercises

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
  • Risk Mitigation Techniques
    • Risk avoidance and factor management
    • Loss prevention
    • Loss control and contingency management
    • Risk financing (insurance , hedging, risk transfer)
    • OP derivatives and “Act-of-God” instruments
  • Managing Operational Risk under Pillar 2 in the Basel III Framework

Integrated Risk Management

  • The COSO Integrated Framework for Managing Risk
  • Building Consistent Operational Risk Management Systems
  • Developing an Enterprise-Wide “Risk Culture”
  • Economic Capital Allocation
  • Integrating Basel III and MiFID Compliance

Summary, Evaluation and Termination of the Seminar