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Links  »  Operational Risk


"Operational risk management" - CRO Forum paper, May 2009

"Modern Operational Risk Management" - thought-provoking 2008 article on operational risk management and the need for more focus on tail events as opposed to BAU risks an losses


Operational Risk Categorisation 

Basel II operational risk categories (see Annexe 9)

Actuarial profession detailed categorisation - based on the common classification system developed by the Risk Classification Working Party as outlined in their 201 paper “A common risk classification system for the Actuarial Profession” (see operational risk sheets)


Operational Risk Capital

"Quantifying regulatory capital for operational risk" - 2005 BIS paper by Paul Embrechts, Hans Jorg Furrer and Roger Kaufmann which looks a Extreme Value Theory to model operational risk

"How to model operational risk, if you must" - 2005 presentation by Paul Embrechts with a good overview of operational risk capital requirements and how may be modelled 

"Observed range of practice in key elements of Advanced Measurement Approaches (AMA)" - 2009 BIS paper which is useful for benchmarking methodology covering inter alia types of distributions used in operational risk modelling 

FSA Operational Risk Standing Group (ORSG) was a forum to discuss the implementation of Basel operational risk requirements for banks, but the discussions (which are minuted) and papers arising are of wider interest in terms of operational risk modelling

ORSG papers

"Operational Risk Modelling Framework" - 2013 Milliman paper outlining some "cutting edge" techniques for modelling operational risk

Among these techniques is Bayesian Networks which aims to develop a probability distribution of operational risk events and losses. Other papers on Bayesian Networks:

"Bayesian Networks Approach to Operational Risk" - Aquaroa et al, 2012

"A Bayesian network structure for operational risk modelling in structured finance operations" - Andrew D. Sanford and Imad A. Moosa, 2008

"Managing Operational Risks with Bayesian Networks" - chapter from "Operational Risk: regulation, analysis and management" (2003) by Carol Alexander

Loss Distribution Approach (LDA) approaches were typically used by banks under the old Advanced Measurement Approach (AMA) to set Pillar 1 operational risk capital requirements.  It is based on banks internal data of event frequency and loss amounts (for insurers, there is usually insufficient internal data to credibly model operational losses and so there will be a need to supplement this with scenario analysis information):

"Loss Distribution Approach for operational riskĀƒ" (A. Frachot, P. Georges & T. Roncalliy, 2001)

Unfortunately, the Basel Committee on Banking Supervision (BCBS) hasdecided to do away with AMA and replace it with the Standardised Measurement Approach (SMA) which sets capital based on business indicators as opposed to internal models. Details of the SME can be found in the BCBS 2016 consultation paper with final details in BCBS' "Basel III: Finalising post-crisis reforms". The Institute and Actuaries contributed to the consultation with its June 2016 response

Life and General Insurance Operational Risk

"Quantifying operational risk in life insurance companies" - 2006 Actuarial profession paper by the life operational risk working party

 Presentation to the 2006 UK Actuarial Life Insurance convention on the above

"Quantifying operational risk in general insurance companies" - 2004 Actuarial profession paper by a general insurance working party

Operational Risk Consortium (ORIC) - founded in 2005, ORIC facilitates the anonymised exchange of operational risk intelligence between member firms, including loss data as well as qualitative information on relevant operational risk exposures.


Banking Operational Risk

Basel Committee - Operational risk - a list of Bank of International Settlements papers on operational risk

"Principles for the Sound Management of Operational Risk - final document" - June 2011 BIS paper on on best practice operational risk management (following on from 2010 consultation paper and February 2003 paper)

"Results from the 2008 Loss Data Collection Exercise for Operational Risk" - 2009 BIS paper

ORX - a leading collator of operational risk loss data from banks

Research page - with research on operational topics such as aggregation of operational risks

Data page - with links to high level reports on ORX data on operational losses


Regulatory Risk incl Conduct Risk

Financial Ombudsman Service

Financial Ombudsman Service annual reviews - annual reports with details of complaints by product, useful for identifying trends

Unfair Contract Terms Guidance by the Office of Fair Trading - compliance with Unfair Terms in Consumer Contracts Regulations is a significant challenge for financial services and other companies

"Responsibilities of providers and distributors for the fair treatment of customers" - FSA paper which places significant obligations on providers and distributors, July 2007

Financial Services Compensation Scheme (FSCS) - FSCS levies can generate significant additional costs for financial services companie and expose them to operational and other failings of their peers 


Rogue Trading and other Dealing Risks  

List of large trading losses

Société Generale rogue trading event paper - paper on Jerome Kerviel's rogue trading which cost SocGen EU4.9bn

"Commodities trading: Nick Leeson, internal controls and the collapse of Barings Bank" - 2004 paper on the Nick Leeson rogue trading event

"Closing the Swap Shop, 1988–91" - chapter on bank losses arising when interest rate swaps they had with Hammersmith and Fulham council were ruled ultra vires in 1991

"Report of JPMorgan Chase & Co. Management Task Force Regarding 2012 CIO Losses" - January 2013 report into JP Morgan's "London Whale" trading loss event

"The Importance of Excel" - February 2013 article by James Kwak on the role played by Excel in the loss


Fraud Risk

Noriwch Union FSA fine in relation to fraud management failings (see also Aviva response)


Offshoring and Outsourcing Risks

"Review of Outsourcing Arrangements in the Asset Management Sector" - FSA 'Dear CEO' letter to asset managers, Decemer 2012

"Offshore operations: industry feedback" - 2005 FSA paper


Unit Linked pricing errors and other issues

"The governance of unit-linked funds" - FCA Thematic Review October 2013

"Unit linked business thematic review: how does it work in practice?" - Actuarial profession October 2013 presentation, with follow-up presentation at the November 2013 Life Conference and article in the November 2013 Actuary magazine

MoneyMarketing article

"A Guide of Good Practice for Unit Linked Funds" (2nd Edition, 2012) - Association of British Insurers

"Unit pricing: Guide to good practice" - Joint Australian Securities and Investment Commission (ASIC) and Australian Prudential Regulatory Authority (APRA) guide, August 2008

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