Chapter 2 - Scenario Identification Process Flashcards
How many pillars are there for the advanced measurement approach (AMA) for operational risk to calculate regulatory capital
4
what is Scenario analysis (SA) a pillar of
AMA, good risk management, internal capital assessment
what is sa focussed on
extremes - not limited to financial impact
how is Scenario analysis accurately defined
the assessment and management of the exposure to high severity, low frequency events on the firm
7 steps of scenario analysis PGAVISI
- Preparation and governance.
- Generation and selection.
- Assessment.
- Validation.
- Incorporation into management.
- Scenario aggregation.
- Incorporation into capital.
main challenge in scenario analysis
consistency of approach and
the mitigation of behavioral biases
a strong regulatory requirement of
scenario analysis
should lead to repeatable results, both quantitative and qualitative.
what does the regulator demand that firms do when conducting scenario identification and assessment
minimize subjectivity and biases - use empirical evidence, explain the rationale behind scenarios, assumptions must be documented
SA preparation and planning is normally the role of which function
risk function - unless the
business has taken full control of the SA process
The general documentation of
the organization and methodology is usually the role of which function
risk function
what does the SA preparation phase include?
defining the scope and objectives of the exercise, identifying the relevant participants, organizing meetings and setting schedules.
who are the participants in the preparation phase
business managers (more senior = better)
risk owners (HR, IT, Compliance, .)
what are Representatives of the risk functions part of the preperartion phase for
To facilitate meetings and to document the process and the content of the
meetings
what is commonly done with preperation pack
distribute documents before the first meetings (and they are not always read anyway)
what is a “preparation pack”
documents that help later selection and assessment of scenarios.
why may you choose to preperation pack from the participants during the generation phase
to keep the brainstorming sessions as free from influence and as creative as
possible.
what do Preparation documents
include
■External loss data
■ Internal loss data
■ RCSA results
■ Key risk indicator scores
■ Audit issues
■ Concentrated exposures,
■ relevant documents for risk and exposure assessment
who should be the participants in SA workshops and brainstorming sessions
senior managers within the different corporate function - significant risk experience knowledgable about operational risks and be open-minded thinkers
myopia
the over-estimation of recent events
what are most large losses experienced by the financial industry due to
internal causes, such as rogue trading, LIBOR rigging, mis-selling, embargo breaches, data losses and internal fraud.
what do the 4 rules of brainstorming aim to achieve
group creativity and reduce social pressures
what are the 4 rules of brainstorming
- Focus on quantity first
- No criticism
- Unusual ideas are welcome
- Combine and improve ideas
SA workgroup facilitators are what type of proffesional
ORM professionals
what is the role of SA workgroup facilitators
initiate discussions at each step of the process, coordinate debates and reach the best consensus based on the input of every member
The initial output of sa group task should contain at least how many scenarios
20-30 scenarios
drawback of risk identification
findings are strongly biased
by what happened in the past -
benefits of screening any
new elements in a business
more revealing and rigorous scenarios that
embrace changes to products, technology, business processes, management , lines of business, third parties and software.
A comprehensive picture of risks is more likely if ..
everyone in the group has a chance to speak
how long should scenario analysis meetings last
no more than three hours on the same day, productivity/creativity decline the longer the meeting
how to maintain focus in scenario analysis meetings
phones should be switched off and other external distractions avoided
what time should scenario analysis meetings be organised
morning, when people are fresh, or second part of afternoon, attention is low immediately after lunch.
A common flaw in many immature organizations
analyzing just one scenario for each risk type, often simply matching the seven risk categories identified by Basel II
Scenario selection
intermediary phase where some scenarios are consolidated and others eliminated or added, to obtain a list relevant enough to be fully assessed
when can Tail risks scenarios be eliminated
if risk owner can convincingly demonstrate that the maximum loss is moderate enough
to be absorbed by normal operating margin
examples of industry bodies that provide ready-made scenario lists to their members
Operational Risk Consortium (ORIC)
Operational Riskdata eXchange Association (ORX)
when to use ready made scenario lists
after scenario generation meeting, so it won’t influence or bias the generation
process
