Seminar on "The Cutting Edge of Operational Risk Management"

NEURAL CAPITAL
Aug 25, 2016
5 min read

THE CUTTING EDGE OF OPERATIONAL RISK MANAGEMENT

SEMINAR CO-DIRECTORS: Dr. RANJAN CHAKRAVARTY and Mr. RAJAT BHATIA

Program Overview

“The Cutting Edge of Operational Risk” is an advanced, 4-day seminar designed specifically for RISK professionals and senior management at global financial and technology firms.

The focus of the seminar is to highlight the “Global Best Practices in Operational Risk”.

A key aspect of this seminar is the “Measurement of Operational Risk in Real Time”, a topic conceptualized for the first time.

Learning Objectives

Develop deep insights into the most recent advancements in the Quantification and Management of OPERATIONAL RISK, which is the most complicated area of RISK today, with significant focus from Regulators and Bank CEOs worldwide
The Actuarial approach to measurement of RISK and the use of appropriate probability distributions is highlighted during this program
The program also focuses on Operational Risk in REAL TIME, a major advancement in RISK practices

Teaching Methodology

Very interactive, Instructor led sessions with considerable industry insights based upon real life experience and the importance of managing OPERATIONAL RISK
Excel and/ or “R” based hands on RISK modeling

Seminar Outline

1. OPERATIONAL RISK IN CONTEXT

Operational Risk & Stranded Capital at major global banks
Forces driving the increase in Ops Risk Capital Charge
Operational Risk Losses due to:
Rogue Trading
External Events
Failed Systems
Operational Risk Events in the run up to the Sub Prime crisis
Operational Risk – A Fuzzy Concept
Types of Operational Risk
Traditional versus Modern Approaches to OPERATIONAL RISK

2. THE REGULATORY ENVIRONMENT

Evolution of Operational Risk methodologies under Basel II
Basel II and III Approaches to Operational Risk
Evolution in Measurement of Operational Risk Capital Charges
The Basic Indicator Approach
The Standardized Approach
Alternative Standardized Approach
Most Recent Standardized Measurement Approach from Basel Committee
Internal Measurement Approach
Advanced Measurement Approach
The Loss Distribution Methodology

3. MEASUREMENT AND REPORTING

Methodologies for computing Operational Risk Capital Charge

Operational Risk Capital Charges for different approaches
Challenges in the use of the Advanced Measurement Approach
Characteristics of Operational Risk Loss Events
Mathematics behind the Advanced Measurement Approach
A Statistical insight into Operational Risk Losses
Historical Data for measuring Expected Operational Risk Losses
Scenario Analysis and Stress Testing
Steps in Scenario Analysis & Stress Testing Procedures: Writing The Algorithm
Calculating 99.9% OpVAR via Internal Measurement Approach
A Practical Example of the Internal Measurement Approach
Calculating the Capital Charge For 99.9% OpVAR using the Loss Distribution Approach

4. QUANTIFICATION OF OPERATIONAL RISK

Choice of suitable distributions to model Loss Severity and Frequency

The four parameter, g&h distribution to model Loss Severity
Modeling Tail Risk using Extreme Value Theory (EVT)
The probability density function of Generalized Extreme Value (GEV)
The probability density function of Generalized Pareto Distribution (GPD)
Empirical Mean Excess function of a Generalized Pareto Distribution
Testing for Goodness of Fit
The algorithm for Monte Carlo simulations of loss scenarios
Poisson Distribution – for determining Frequency of Losses
Assessing Severity of an Operational Loss
The Lognormal Distribution for assessing Loss Severity
The challenge behind combining LOSS FREQUENCY and LOSS SEVERITY DISTRIBUTIONS
Cumulating the Likelihood and Severity Distributions
Techniques for Cumulating Frequency and Severity Distributions
IMPACT versus LIKELIHOOD of Operational Risk Loss Events
Operational Risk: FREQUENCY versus SEVERITY Map
Modeling the LOSS FREQUENCY DISTRIBUTION, N
Modeling the LOSS SEVERITY DISTRIBUTION at two levels
The Sting of Operational Risk is in The Tail
Best practices in the simulation of Operational Losses

5. OPERATIONAL RISK CAPITAL CHARGE

Regulatory Capital versus Economic Capital in Operational Risk
Transforming Risk Information into Risk Capital
Capital Charge for Operational Risks
Evolution of Operational Risk Capital Charge
Stage ONE - The BASIC APPROACH
Stage TWO - The STANDARDIZED APPROACH
Stage THREE - The ADVANCED MEASUREMENT APPROACH
Stage FOUR - The LOSS DISTRIBUTION APPROACH
Transforming Risk Information and Loss Data Into Operational Risk Capital Charge
Gross Losses by Business Lines and event Types - Loss Severity reported to ORX from 2008 to 2012

6. RECENT STANDARDIZED MEASUREMENT APPROACH

Withdrawal of AMA for Operational Risk modeling

Introducing the Standardized Measurement Approach for modeling Operational Risk Capital
The New Standardized Measurement Approach of June 2016
Inclusion of bank specific Historical Losses into the SMA
Computation of the Business Indicator (BI)
Asymmetries in the Services component of BI
Inconsistencies in the treatment of Dividend Income
Overcapitalization of banks with a high Net Interest Margin
Overcapitalization of banks with high Fee Component of BI
Inconsistent treatment of Leasing compared with Credit
Computation of the new Business Indicator
Adding the Loss Component to the Business Indicator
Computing Loss Component and the Internal Loss Multiplier
Capital charge under Standardized Measurement Approach

7. MEASURING OPERATIONAL RISK IN REAL TIME

NEURAL’s Real Time Ops Risk Framework for Global Banks
Framework for Real Time Operational Risk analytics & visualization
REAL TIME Engine for Global Operations Risk Analytics
Leveraging BIG DATA and HADOOP for Operational Risk
High Performance Operational Risk Computing
Complex Event Processing (CEP)
Risk Dashboards for each layer of Management in a Global Bank
Global Heat Map for Country-by-Country Operations Risk
Real Time Operational Management Systems (R-TOMS)

8. CASE STUDY ONE:

Implementation of Operations Risk at a Leading Full Service Asian Bank

Operational Risk Revamp: Phase 1 – The Baselines
Operational Risk Revamp: Phase 2 – Policy & Procedures
Operational Risk Revamp: Phase 3 – Processes & Assurance
Milestones in the Operational Risk Revamp at Bank Alpha
Steps for Basel II, Operational Risk compliance at Bank Alpha

9. CASE STUDY TWO:

Operations Risk Strategy at a Major European Bank with Global Operations

Strategic Actions Undertaken at Bank Delta
Stakeholder Management and Committee Reporting
Actions taken after the Operational Risk Project
Creating Policies, Processes and Procedures
Documentation and Training
Putting Best Practices in Place
Ensuring the Documentation meets Regulatory Scrutiny
Technical Libraries and Approvals
Establishing Benchmarks and Setting Up The Technical Content
Approvals, Checks and Balances as Processes
How Basel II, Operational Risk compliance was achieved at Bank Delta

10. CASE STUDY THREE:

Managing the Operations Risk at a Global Derivatives Exchange

Risk Control Self-Assessment at a Global Exchange
Workflow for Risk Control Self-Assessment
Aims of Risk Control Self-Assessment
Key Risk Indicators assessment at a Global Derivatives Exchange
Business Continuity Plans in Operations Risk at an Exchange
What the regulators observed and look for in the Business Continuity Plans
Process Mapping for Operational Risk in an Exchange
Inputs for mapping of Risk Processes
Outputs from the Risk Process Mapping exercise
Training Non-risk Departments to Identify their KRIs
Mapping Processes, Assessing Risks and Developing KRIs at a Global Derivatives Exchange
Operational Risk Scorecards