Operational Risk Management, 2nd Edition

CHAPTER 8External Loss Data

In this chapter, we consider the use of external loss data in the operational risk framework. In addition to the events that have occurred within a firm, the operational risk department will look at those that have occurred outside the firm. These events can offer valuable insight into the operational risks faced at the firm, and may also provide input into any operational risk capital calculation. External data is also a required element in an Advanced Measurement Approach (AMA) capital calculation and in the new Standardized Approach. The use of external data in capital calculations is considered further in Chapter 12.

EXTERNAL OPERATIONAL RISK EVENT DATA

External events are useful in many areas of the firm's operational risk framework. They can help inform the risk and control self-assessment activities, they can provide sample input for scenario analysis, and they might be used to develop key risk indicators that monitor the changing business environment.

The role of external data in the operational risk framework is illustrated in Figure 8.1.

External events are often of real interest to senior management, as major news headlines are often associated with operational risk. External data is therefore a key element in the development of a strong operational risk culture and a firm-wide awareness of the importance of effective operational risk management. When events occur in the industry among peers and competitors, it helps to underscore the ...