Operational risk and risk governance

Question 1

Definition of OpR (Basel II)

Answer 1

„the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events”

Question 2

Mitigation of OpR

Answer 2

OpR are managed with a broad range of tools and activities:
* Management at the source by process improvement and
enhancement of controls
* HR management: from hiring to training and retaining of talented employees and managers.
* Specific investments and/or increased staffing might be required therefore keep trade-off between cost and benefit under control.
* Implement back-up systems and define contingency plans.
* Transfer risk to insurance companies if possible and if cost efficient.
* Wide randasge of insurance protection available (from coverage of unauthorized trading to natural disasters).

Question 3

Modeling Operational Losses

Answer 3

Combination of frequency (Häufigkeit) distribution with severity (Grössenverteilung) distribution (e.g. by Monte Carlo simulation)

to derive

the loss distribution (e.g. distribution of the potential total OpR loss amount for a year)

Question 4

Measurement approaches of Basel II (and III) for operstional risk

Answer 4

Basel II has defined three methods:

• Basic Indicator Approach (BIA)
• The Standardised Approach (TSA) and
• Advanced Measurement Approach (AMA)

Question 5

Key Risk Indicator (KR Drivers)

Answer 5

A Key Risk Indicator (KRI) is a causal factor (or a proxy of
such a factor) that indicates an increased likelihood of loss
(or even an inevitable loss)

Some Examples from Banking:
 Illness (quota)
 Employee turnover
 Overtime (of employees)
 Number of customer complaints
 Backlog in administration
 Number of open confirmations (with brokers)
 Project deadlines broken or at risk
 IT capacity utilization