Fundamental Aspects of Operational Risk and Insurance Analytics: A Handbook of Operational Risk

Preface

Operational risk (OpRisk) has been through significant changes in the past few years with increased regulatory pressure for more comprehensive frameworks. Nowadays, every mid-sized and larger financial institution across the planet has an OpRisk department. However, if we compare the pace of progress of OpRisk to market and credit risks, we would realize that OpRisk is not advancing as fast as its sister risks moved in the past. Market risk management and measurement had its major breakthrough in the early 1990s as J.P. Morgan released publicly its Value-at-Risk (VaR) framework. Only a couple of years after this release, most of the 100 global largest banks had developed a market risk framework and were using, at least to a certain level, VaR methods to measure and manage market risk. A few years later, the Basel Committee allowed banks to use their VaR models for regulatory capital purposes. From the release of JP Morgan’s methodology to becoming accepted by Basel and local regulators, it took only about 4 years. This is basically because the methods were widely discussed and the regulators could also see in practice how they would work. As we see it, one of the biggest challenges in OpRisk is to take this area to the same level that market and credit risk management are at. Those two risks are managed proactively and risk managers usually have a say if deals or businesses are approved based on the risk level. OpRisk is largely kept out of these internal decisions ...