1st Edition

Operational Risk Modelling and Management

By Claudio Franzetti Copyright 2011
    416 Pages 96 B/W Illustrations
    by Chapman & Hall

    414 Pages 96 B/W Illustrations
    by Chapman & Hall

    Taking into account the standards of the Basel Accord, Operational Risk Modelling and Management presents a simulation model for generating the loss distribution of operational risk. It also examines a multitude of management issues that must be considered when adjusting the quantitative results of a comprehensive model.

    The book emphasizes techniques that can be understood and applied by practitioners. In the quantitative portions of the text, the author supplies key concepts and definitions without stating theorems or delving into mathematical proofs. He also offers references for readers looking for further background information. In addition, the book includes a Monte Carlo simulation of risk capital in the form of a run-through example of risk calculations based on data from a quantitative impact study. Since the computations are too complicated for a scripting language, a prototypical software program can be downloaded from www.garrulus.com

    Helping you navigate the tricky world of risk calculation and management, this book presents two main building blocks for determining how much capital needs to be reserved for operational risk. It employs the loss distribution approach as a model for calculating the risk capital figure and explains risk mitigation through management and management’s actuations.

    Introduction to Operational Risk
    Why Regulate Banks?
    Additional Supervision
    The Basel Regulatory Effort
    Risk and Capital
    What Is Operational Risk?
    Economic Capital for Operational Risk
    Operational Risk under Basel 2
    Role of Insurance
    Regulation after the Crisis

    The Problem Context
    General Remarks
    The Data Problem
    The Dependency Problem
    The Insurance Problem
    The Mapping Problem
    The Management Problem
    Strategic Risks of a Bank
    AMA Standards
    The Knowledge Problem
    Probability, Causality and Other Primitives

    The Modelling Approach
    Simulation and the Monte Carlo Method
    General Model Structure
    Data Requirements
    Data Modelling and Distributions
    Run-Through Example: Quantitative Impact Study Data
    Correlation of Losses
    Risk Measures and Allocation
    Insurance Modelling and Mitigation
    Mapping Events to Insurance Policies
    Mapping Events to Lines of Business
    Calculating the Economic Capital
    Results of the Run-Through Example
    Summary and Conclusion

    Managing Operational Risk
    Management and Organisation
    Operational Risk Framework
    Operational Risk Structure
    Operational Risk Process
    Business Environment and Internal Control Factors
    Scenario Analysis
    Optimising the Insurance Programme
    Audit, Reporting and Disclosure of Operational Risk
    Risk Management versus Internal Control
    Summary and Conclusion






    Claudio Franzetti is the chief risk officer of Swiss Export Risk Insurance (SERV) in Zurich and president of Garrulus Enterprise Ltd. He has previously worked at Aon Resolution AG, Deutsche Bank, Swiss Re, and Iris AG.

    This book outlines a complete and detailed description of one specific approach to modeling operational risk in accordance with Basel 2. However, the approach could easily be applied in the wider financial services sector. The author also offers some prototypical software to take you through the book’s example. … This book would be most useful for new entrants into the risk management arena, particularly in banking but also in financial services generally. For those thinking about operational risk for the first time, it would give some useful background and theory. For the more experienced in the operational risk field, it would serve better as a reference document.
    —Andrew Couper, Annals of Actuarial Science, Vol. 5, 2011

    In this book, Claudio Franzetti deals with operational risks such as those recently brought into focus through the financial crisis (especially in the banking industry) … [He] handles the subject almost entirely without mathematical proofs and theorems and finds simple explanations for complicated relationships. In addition, the rich literature list stimulates further reading.
    Absolut report, February 2011