Operational Risk Analytics

The Basel II framework requires banks to hold capital charge for operational risk under Pillar I. It prescribes three methods for calculating operational risk capital charges in a continuum of increasing sophistication and risk sensitivity. Banks are encouraged to move along the spectrum of available approaches as they develop more sophisticated operational risk measurement systems and practices.

The Advanced Measurement Approach (AMA) is the most sophisticated approach. This approach does not use Gross Income, but loss data to model the losses. The Loss Distribution Approach (LDA) is one of the most accepted methods currently available within the AMA. Under the LDA approach, we help our clients to assess the frequency and severity distributions of operational risk losses of operational risk event class are estimated. These distributions are used to model the aggregated loss distribution by using Monte Carlo simulation.

Collection of Loss Data - Both Internal & External

• Collect internal data on loss events occurred in the past and on continuing basis in future.
• Collect loss data from external sources.
• Support in developing the loss data depository on IT platform.

Data Preparation

• Cleaning up data for missing values etc, organizing it business lines and event wise, and transforming the data suitably by scaling, thresholding etc.
• Adjust internal loss data for BEICFs factors.

Scenario Analysis

Conduct scenario analysis for estimating tail event loss data for all business lines

Modeling

• Estimate frequency distribution of losses for each of the business entities by using the cleaned & adjusted loss data
• Estimate the severity distribution of losses for each of the business entities
• Develop Loss distribution by using simulation technique based on frequency and severity distributions derived earlier
• Work out the Operational Loss Value-at-Risk at a suitable quantile of the operational risk loss distribution.
• Estimate the Ops risk VaR and obtain the Boards approval.

Preparation of Documentation

Documentation of the methodology for AMA and results of simulation exercise for independent verification.

Submission to Regulator

Present the results on calculation of Operational Risk Capital charge to CBO along with detailed process documentation.