Operational Risk Toward Basel III: Best Practices and Issues in Modeling, Management, and Regulation (Wiley Finance)

Operational Risk Toward Basel III: Best Practices and Issues in Modeling, Management, and Regulation......Page 5
Contents......Page 7
Foreword......Page 11
About the Editor......Page 13
Acknowledgments......Page 15
About the Contributors......Page 17
PART One: Operational Risk Measurement: Qualitative Approaches......Page 31
CHAPTER 1: Modeling Operational Risk Based on Multiple Experts’ Opinions......Page 33
1.1 INTRODUCTION......Page 34
1.2 OVERVIEW OF THE AMA MODELS......Page 35
1.3 USING EXPERTS’ OPINIONS TO MODEL OPERATIONAL RISK: A PRACTICAL BUSINESS CASE......Page 39
1.4 COMBINING EXPERTS’ OPINIONS......Page 42
1.5 SUPRA-BAYESIAN MODEL FOR OPERATIONAL RISK MODELING......Page 44
NOTES......Page 48
REFERENCES......Page 49
2.1 INTRODUCTION......Page 53
2.2 CURRENT PRACTICES OF OPERATIONAL RISK MEASUREMENT AND REGULATORY APPROACHES......Page 56
2.3 MAIN MEASUREMENT CHALLENGES OF LDA......Page 66
2.4 CONCLUSION......Page 82
APPENDIX......Page 84
NOTES......Page 87
REFERENCES......Page 93
3.1 INTRODUCTION......Page 99
3.2 LOSS DISTRIBUTION APPROACH......Page 101
3.3 COMPLEMENTARY LOSS EVALUATIONS......Page 103
3.4 SUBJECTIVE INFORMATION ANALYSIS......Page 104
3.5 INTEGRATION OF THE SUBJECTIVE AND THE QUANTITATIVE ANALYSIS......Page 112
REFERENCES......Page 114
4.1 INTRODUCTION......Page 115
4.2 WHY SOME UNEXPECTED LOSSES CANNOT BE STUDIED IN SCENARIO GROUPS......Page 116
4.3 REQUIRED FEATURES FOR A NEW METHODOLOGY TO EXPLORE UNPRECEDENTED CATASTROPHES......Page 118
4.4 USING STOCHASTIC DYNAMICS TO DRIVE EVENTS IN A NETWORK COMBINING ACTORS......Page 119
4.5 OBTAINING RISK-GENERATING NODES IN A NETWORK GRAPH......Page 120
4.6 GENERATING LOSSES IN A STOCHASTIC MULTISTEP DYNAMIC......Page 122
4.8 REQUIREMENTS OF MODEL EVOLUTION BY LEARNING......Page 123
4.9 CONCLUSION......Page 124
REFERENCES......Page 126
CHAPTER 5: Identifying and Mitigating Perceived Risks in the Bank Service Chain: A New Formalization Effort to Address the Intangible and Heterogeneous Natures of Knowledge-Based Services......Page 127
5.1 INTRODUCTION......Page 128
5.2 BANKS IN THE POST–SUBPRIME ERA: AN IMPORTANT SECTOR IN TURMOIL......Page 130
5.3 NOTION OF PERCEIVED RISK: LITERATURE REVIEW......Page 133
5.4 BANK SERVICE CHAIN: CHAIN OF SERVICES AND OF RISK EVENTS......Page 135
5.5 CONTROL SYSTEM DESIGNED TO ADDRESS THE INTANGIBLE NATURE OF SERVICE RISKS......Page 138
5.6 APPLICATION OF THE TEID MODEL: THE SOCGEN CASE......Page 139
REFERENCES......Page 141
CHAPTER 6: Operational Risk and Stock Market Returns: Evidence from Turkey......Page 145
6.1 INTRODUCTION......Page 146
6.2 OPERATIONAL LOSSES AND THE BANKING SECTOR IN TURKEY......Page 148
6.3 REACTION OF STOCK RETURNS TO OPERATIONAL RISK EVENTS......Page 150
NOTES......Page 156
REFERENCES......Page 157
PART Two: Operational Risk Measurement: Quantitative Approaches......Page 159
CHAPTER 7: Integrating Op Risk into Total VaR......Page 161
7.1 INTRODUCTION......Page 162
7.2 A BRIEF REVIEW OF INTEGRATED RISK MANAGEMENT IN THE PRESENCE OF OPR......Page 164
7.3 CLOSED-FORM APPROXIMATION BASED ON MSHM IN THE MODERATELY HEAVY-TAILED CASE......Page 168
7.4 SIMULATION RESULTS......Page 173
7.5 CONCLUSION......Page 178
NOTES......Page 180
REFERENCES......Page 183
8.1 INTRODUCTION......Page 185
8.2 PRELIMINARIES: POISSON MIXTURES AND IMPORTANCE SAMPLING......Page 188
8.3 MODERATELY HEAVY-TAILED CASE: LOGNORMAL SEVERITY......Page 195
8.4 HEAVY-TAILED CASE: PARETO SEVERITY......Page 197
8.5 SIMULATION RESULTS......Page 200
8.6 CONCLUSION......Page 203
REFERENCES......Page 205
CHAPTER 9: One-Sided Cross-Validation for Density Estimation with an Application to Operational Risk......Page 207
9.1 INTRODUCTION......Page 208
9.2 ONE-SIDED CROSS-VALIDATION METHOD FOR DENSITY ESTIMATION......Page 209
9.3 ASYMPTOTIC THEORY......Page 212
9.4 FINITE SAMPLE PERFORMANCE......Page 214
9.5 PRACTICAL REMARKS AND DATA APPLICATIONS......Page 219
9.6 CONCLUSION......Page 223
REFERENCES......Page 224
CHAPTER 10: Multivariate Models for Operational Risk: A Copula Approach Using Extreme Value Theory and Poisson Shock Models......Page 227
10.1 INTRODUCTION......Page 228
10.2 STANDARD LDA APPROACH......Page 229
10.3 AGGREGATION VIA COPULA......Page 237
10.4 EMPIRICAL ANALYSIS......Page 243
REFERENCES......Page 246
CHAPTER 11: First-Order Approximations to Operational Risk: Dependence and Consequences......Page 249
11.1 INTRODUCTION......Page 250
11.2 FROM PARETO COPULAS TO PARETO LEVY COPULAS......Page 253
11.3 UNDERSTANDING THE DEPENDENCE STRUCTURE......Page 258
11.4 APPROXIMATING TOTAL OpVaR......Page 260
11.5 CONCLUSION......Page 273
REFERENCES......Page 274
PART Three: Operational Risk Management and Mitigation......Page 277
12.1 INTRODUCTION......Page 279
12.2 LIMITED SCOPE OPERATIONAL RISK MANAGEMENT UNDER BASEL II......Page 280
12.3 MANAGEMENT PERSPECTIVE IN OPERATIONAL RISK MANAGEMENT......Page 284
12.4 RENDERING OPERATIONAL RISK MANAGEMENT OPERATIONALLY MANAGEABLE......Page 285
12.5 RECOMMENDATIONS AND OUTLOOK......Page 296
NOTES......Page 297
REFERENCES......Page 298
13.1 INTRODUCTION......Page 301
13.2 OPERATIONAL RISK MANAGEMENT AS ENFORCED SELF-REGULATION......Page 302
13.3 OPERATIONAL RISK: BIRTH OF AN INDUSTRY......Page 309
13.4 CONCLUSION......Page 315
REFERENCES......Page 316
CHAPTER 14: OpRisk Insurance as a Net Value Generator......Page 319
14.2 TREATMENT OF INSURANCE CONCEPTS UNDER BASEL II’S OPRISK CATEGORY......Page 320
14.3 A MORE ENCOMPASSING VIEW ON INSURANCE CONCEPTS FOR OPRISK MANAGEMENT......Page 322
14.4 RISK, COST OF CAPITAL, AND SHAREHOLDER VALUE......Page 327
14.5 OPTIMIZATION OF THE TOTAL COST OF RISK......Page 333
14.6 CONCLUSIONS, RECOMMENDATIONS, AND OUTLOOK FOR FURTHER RESEARCH......Page 336
REFERENCES......Page 337
CHAPTER 15: Operational Risk Versus Capital Requirements under New Italian Banking Capital Regulation: Are Small Banks Penalized?......Page 341
15.1 INTRODUCTION......Page 342
15.2 OPERATIONAL RISK CAPITAL REQUIREMENTS UNDER ITALIAN INSTRUCTIONS FOR BANKS......Page 344
15.4 METHODOLOGY......Page 346
15.5 RESULTS......Page 361
15.6 CONCLUSION......Page 363
REFERENCES......Page 364
16.1 INTRODUCTION......Page 367
16.2 LOSS PROCESS AND CONTRACTS......Page 370
16.3 PRICING OF INSURANCE CONTRACTS......Page 371
16.4 RISK REDUCTION......Page 372
16.5 MONTE CARLO SIMULATION......Page 377
16.6 POLICY IMPLICATIONS......Page 383
16.7 CONCLUSION......Page 384
NOTES......Page 385
REFERENCES......Page 387
PART Four: Issues in Operational Risk Regulation and the Fund Industry......Page 389
17.1 INTRODUCTION......Page 391
17.2 IMPORTANCE OF A SOUND LEGAL FRAMEWORK......Page 392
17.3 LITERATURE ON STOCK MARKET RETURNS AND COUNTRY RISK......Page 393
17.4 MARKET RISK AND ECONOMIC CAPITAL......Page 395
17.5 SYSTEMIC EARNINGS AT RISK MODEL......Page 398
17.7 MODEL AND METHODOLOGY......Page 399
17.8 ECONOMIC AND REGULATORY CAPITAL MODEL......Page 400
17.10 CONCLUSION......Page 404
NOTES......Page 407
REFERENCES......Page 408
CHAPTER 18: Operational Risk Disclosure in Financial Services Firms......Page 411
18.1 INTRODUCTION......Page 412
18.2 RISK DISCLOSURE STUDIES......Page 413
18.3 REGULATORY GUIDELINES ON RISK DISCLOSURE......Page 415
18.4 STUDY OF OPERATIONAL RISK DISCLOSURES......Page 416
18.5 CONCLUSION......Page 421
NOTES......Page 423
REFERENCES......Page 424
CHAPTER 19: Operational Risks in Payment and Securities Settlement Systems: A Challenge for Operators and Regulators......Page 427
19.1 INTRODUCTION......Page 428
19.2 OVERVIEW OF THE REGULATORY APPROACHES TO OPERATIONAL RISK IN PCSSs......Page 429
19.3 IMPLICATIONS OF OPERATIONAL RISK FOR PAYMENT, CLEARING, AND SETTLEMENT SYSTEMS......Page 432
19.4 CONCLUSION......Page 437
NOTES......Page 440
REFERENCES......Page 441
20.1 HISTORY OF THE SUBPRIME CRISIS AND THE ROLE OF HEDGE FUNDS, FINANCE COMPANIES AND PLANNERS, AND MORTGAGE BROKERS......Page 443
20.2 CURRENT PRUDENTIAL REGULATORY SYSTEM GOVERNING NBFIs......Page 445
20.3 ROLE OF HEDGE FUNDS......Page 446
20.4 POTENTIAL FOR SYSTEMIC RISK AND CONTAGION FROM HEDGE FUNDS, MORTGAGE LENDERS, AND UNREGULATED FINANCE COMPANIES......Page 448
20.5 LACK OF PROTECTION OF BORROWERS AND LENDERS EXPOSED BY THE SUBPRIME CREDIT CRISIS......Page 450
20.6 MECHANISMS FOR TRANSNATIONAL CRIME......Page 454
20.7 CONCLUSION: A REGULATORY BLACK HOLE AND A FIELD RIFE FOR FUTURE RESEARCH......Page 459
REFERENCES......Page 462
21.1 INTRODUCTION......Page 465
21.2 MARKET RISK AND OPERATIONAL RISK......Page 466
21.3 DUE DILIGENCE AND MANAGER TRANSPARENCY......Page 467
21.4 FOUR RECENT FRAUDS HIGHLIGHT THE IMPORTANCE OF OPERATIONAL RISKS......Page 470
21.6 PROPOSAL FOR PARTIAL TRANSPARENCY......Page 477
21.7 CONCLUSION......Page 480
REFERENCES......Page 481
CHAPTER 22: A Risk of Ruin Approach for Evaluating Commodity Trading Advisors......Page 483
22.1 INTRODUCTION......Page 484
22.3 METHODOLOGY......Page 485
22.4 RESULTS......Page 487
REFERENCES......Page 493
23.1 INTRODUCTION......Page 495
23.2 WHAT IS OPERATIONAL VALUATION RISK?......Page 496
23.3 VALUATION RISK: STRATEGY RELATED......Page 497
23.4 VALUATION RISK: CONTROL RELATED......Page 499
23.5 EVALUATING AND MITIGATING VALUATION RISK......Page 502
23.6 SUMMARY AND SYNTHESIS OF SOUND PRACTICE GUIDELINES FOR FUND VALUATION FROM AIMA AND THE MFA......Page 504
REFERENCES......Page 506
Index......Page 509