Operational Risk Capital Models
First published:
ISBN: 9781782722014
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Evolving from a Plain Vanilla to a State-of-the-Art Model
Introduction
Collection of Operational Loss Data: ILD and ED
Scenario Analysis Framework and BEICFs Integration
Loss Data Modelling: ILD and ED
Scenario Analysis Modelling
BEICFs Modelling and Integration into the Capital Model
Hybrid Model Construction: Integration of ILD, ED and SA
Derivation of the Joint Distribution and Capitalisation of Operational Risk
Backtesting, Stress Testing and Sensitivity Analysis
Evolving from a Plain Vanilla to a State-of-the-Art Model
Strategic and Operational Business Planning and Monitoring
Risk–Reward Evaluation of Mitigation and Control Effectiveness
Previous chapters have described the components of a state-of-the-art operational risk capital model. However, institutions generally start with much simpler models and progressively evolve by adding the analytics required for much more realistic and forward-looking capital estimates. In this chapter we look at the progressive steps that an institution may take to evolve the model from plain vanilla to fully developed.
The process of building a state-of-the-art operational risk capital model that accurately reflects a forward-looking risk profile has various phases, which include an initial regulatory approval of the capital model. Although there is no equal case in how an institution arrives at a fully developed capital model, Figure 10.1 represents a common path.
Along the implementation of a mature operational risk capital model, institutions pass by different typical model development stages, which are summarised in this chapter and are based on the experiences of the authors. The capital model enhancement drivers are the understanding and automation of the required analytical processes, as well as the integration of the capital results
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