Scenario Analysis for Basel Ii Operational Risk Management

2572 Words Aug 23rd, 2008 11 Pages
1 Introduction: Scenario Analysis for Potential Catastrophic Losses 1
2 Addressing Operational Risk 3
3 Scenario Analysis in a Risk Measurement Framework 5
4 Scenario Analysis in a Risk Management Framework 6
5 Achieving Risk Measurement and Management 6
6 Conclusion: Benefiting from Scenario Analysis 7

1 Introduction: Scenario Analysis for Potential Catastrophic Losses “Are you saying that you want us to figure out how to lose R50 million?” asked the risk manager for the fund technology and services unit of a large bank. “Obviously, you have no idea how our funds are managed or what extreme measures we take to make sure that no money is lost.”
With a hint of pride in his voice,
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Financial institutions have always recognized the importance of safeguarding customer data. However, the impact of data compromise has increased substantially as identities have migrated from visual to digital. Scenarios like the ones mentioned above have become significant due to never-before-seen levels of regulatory fines and litigation expenses.
The New Basel Capital Accord (Basel II) requires financial institutions to develop a comprehensive loss distribution so that they can more accurately estimate their risk profile and reserve requirements. In particular, Basel II adds operational risk to the traditional categories of credit risk and market risk that are currently used to estimate capital requirements.
2 Addressing Operational Risk
By including operational risk in the calculation metrics for the New Capital Accord, Basel II has recognized that credit and market risks are not the only exposures that a bank may face. The complexity of calculating operational risk is, however, compounded by the fact that the internal loss history of a financial institution does not adequately account for all the operational risks and exposures faced by that institution.
To augment internal experiential data, Basel II recommends that financial institutions look to external events and scenarios. External loss data cannot be readily used in capital calculations due to the inherent shortcomings of the reliability of