Operational Risk Modelling and Management  book cover
1st Edition

Operational Risk Modelling and Management

ISBN 9781439844762
Published October 15, 2010 by Chapman and Hall/CRC
413 Pages 96 B/W Illustrations

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Book Description

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.

Table of Contents

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





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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