MEASUREMENT FRAMEWORK FOR OPERATIONAL RISK

LDA – ACTUARIAL MODEL

DR. PAMUJI G. RAHARJO, SE., MM.

LECTURE#9 – RSK.19 提供
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 LOGO ADVANCE MEASUREMENT APPROACH (AMA)

Based on a proportionality assumption

between the EL and UL.

Based on the distribution of Based on calculating a score

frequency and the severity of for the risks measured by an
losses. entity and acting on its
changing values.

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 2

 LOGO SCORECARD APPROACH

Risk Event Type Control Risk

Internal fraud 2.5 3.2

External fraud 4.2 1.3

Employment practices and workplaces safety 3.2 2.2

Clients products and business practices 4.2 3.3

Damage due to physical assets 3 4

Business disruption and system failures 1.4 4

Execution, delivery and process management 4 2

Scorecard menggunakan skala berikut ini:

Control/Pengendalian Risiko
1 – Very Poor 1 – very low
2 – Poor 2 – low
3 – Average 3 – average
4 – Good 4 – High
5 – Very Good 5 – Very High
Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 3
 LOGO IMA VERSUS LDA

 IMA is an attempt to mimick LDA through a simplified, easy

to implement way.

 While LDA requires the use of disaggregated data (on a single

event basis), the implementation of IMA would be based on
aggregated data like the number of events, the total loss by
event type, an exposition index, etc.

 To ensure a good approximation of LDA by IMA, a gamma

factor and a risk profile index — which remains to be
precisely defined — would be added on.

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 4

 LOGO LOSS DISTRIBUTION APPROACH

Under this approach, the bank estimates,

for each business line/risk type cell, the
probability distributions of the severity
(single event impact) and of the one year
event frequency using its internal data.

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 5

 LOGO OPERATIONAL RISK IDENTIFICATION

Type of Operational Risk Events:

• Any actual occurrence which causes material loss to an
organisation.
• Any actual occurrence which nearly causes material loss to
an organisation (a “near miss”).
• Any actual occurrence which is considered likely to cause a
material loss in the future.
• Any actual occurrence which, cumulatively with other
events, does or could cause a material loss.

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 6

 LOGO LOSS DISTRIBUTION APPROACH (LDA)

TYPOLOGY OF OPERATIONAL RISKS

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 7

 LOGO LOSS DISTRIBUTION APPROACH (LDA)

CYBER RISK TAXANOMY 2019

Source: ORX Cyber Risk Presentation – March 2019 Page 8

 LOGO OPERATIONAL RISK IDENTIFICATION

How to recognize an Operational Loss Events?

• Experience – it has happened before,
• Judgement – I know the business and I believe this is a risk,
• Effect – a loss has been experienced and this is what caused
it,
• Impression – this nearly caused a loss,
• Comparison - a risk event template,
• Chaining – this event, although apparently innocuous,
caused another risk event to happen,
• Regulation – I am told this is a risk,
• Cultural – this is against public morals and laws so ought to
be a risk.

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 9

 LOGO OPERATIONAL RISK IDENTIFICATION

What to do with a risk event ?

• Record the event,
• Measure or assess the effect (cost) of the event,
• Allocate the event to an owner,
• Allocate the event to a part of the organisation
• Report the event to the appropriate person (or possibly
external body),
• Start a risk mitigation process (what to do so that this does
not happen in the future),
• Identify linked (“causing or caused”) risk events,
• Update corporate risk statistics,
• Update company procedures and standards (if necessary).

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 10

 LOGO OPERATIONAL RISK IDENTIFICATION

• Checklists:
– Menyusun kuisioner yang terstruktur untuk
mengidentifikasi tingkat risiko dan kontrol.
• Narratives:
– Masing-masing business unit/unit kerja diminta untuk
membuat kuisioner sendiri yang menggambarkan risiko
yang melekat.
• Facilitated workshops:
– Mengadakan diskusi langsung dengan melibatkan
seorang fasilitator guna melakukan identifikasi risiko
dan membuat konsesus meengenai mitigasinya

Or all three can be used together or with self-assessment techniques

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 11

 LOGO OPERATIONAL RISK IDENTIFICATION

Dr. Pamuji G. Raharjo – Program MM FEB UI / 2020 Page 12

 LOGO OPERATIONAL RISK IDENTIFICATION
No. Level 1 Level 2 Activity Group
1 Corporate Finance Corporate Finance Merger & Acquisition; Underwriting,
Municipal/Government Finance Privatisations; Research, Debt (Government/High
Merchant Banking Yield), Equity, Sindications, IPO, Secondary
Advisory Services Private Placements.
2 Trading & Sales Sales Fixed Income, Equity, Foreign Exchanges,
Market Making Commodities, credit, funding, own position
Proprietary Positions securities, lending and repos, brokerage, debt,
Treasury prime brokerage
3 Retail Banking Retail Banking Retail lending and deposits, banking services, trust
and estates
Private Banking Private lending and deposits, banking services,
trust and estate, investment advice
Card Services Merchant/Commercial/Corporate Cards, private
labels and retail.
4 Commercial Banking Commercial Banking Project Finance, real estate, export finance, trade
finance, factoring, leasing, lends, guarantees, bill of
exchanges

5 Payment & Settlement *) External Clients Payment and collections, funds transfer, clearing
and settlement
6 Agency Services Custody Escrow, Depository Receipts, Securities lending
(customers), Corporate Actions
Corporate Agency Issuer & Paying Agents
Corporate Trust
7 Asset Management Discretionary Fund Management Pooled, Segregated, retail, institutional, closed,
open, private equity
Non-Discretionary Fund Management Pooled, Segregated, retail, institutional, closed,
open
8 Retail Brokerage Retail Brokerage Execution and full services
*)Payment & Settlement losses related to a bank's own activities would be incorporated in the loss experiences of the affected business line
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 LOGO LOSS DISTRIBUTION APPROACH (LDA)

4
1
Internal Fraud Damage to Clients, products & 6
physical assets Business practices
– Aktivitas yang tidak • Bencana • Kesesuaian, pengungkapan
diotorisasi (unauthorized • Kejadian lain dan penjaminan
activity) • Praktek bisnis atau pasar
– Pencurian (theft) yang tidak sehat
– Fraud • Cacat produk
• Kegiatan advisory
Operational Risk • Pemilihan, sponsor dan
2 External Fraud eksposur
Event Types
• Sistem pengamanan
Execution, deliver &
(systems security) 7
Process management
• Pencurian (theft) Business Disruption &
• Fraud 5
System failures
• Pengambilan transaksi,
• Systems eksekusi dan pemeliharaan
• Pemantauan dan pelaporan
Employment practices &
3 • Penerimaan nasabah dan
Workplace safety
dokumentasi
• Hubungan karyawan • Pengelolaan rekening
• Keamanan lingkungan kerja nasabah/klien
• Pembedaan dan diskriminasi • Trade counterparties
• Vendors & Suppliers
Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 14
 Kategori Kejadian Risiko Operasional
LOGO
Kategori Kejadian (level 1) Definisi Kategori (level 2) Contoh aktivitas (level 3)

Internal Fraud Kerugian akibat tindakan dari tipe yang
dimaksudkan untuk penggelapan,
ketidaksesuaian properti atau pelanggaran
peraturan, hukum atau kebijakan perusahaan,
tidak termasuk pembedaan/diskriminasi, yang
melibatkan paling tidak satu pihak internal
bank.
Aktivitas yang tidak diotorisasi
Pencurian dan penipuan
- Transaksi tidak dilaporkan dengan sengaja
- Tipe transaksi yang tidak diotorisasi (disertai
kerugian keuangan)
- Kesalahan dalam menilai (mismarking) posisi
transaksi treasury dengan sengaja
- Penipuan kredit, simpanan yang dibuka oleh
nasabah dengan bantuan pihak internal bank
yang digunakan tidak semestinya
- Pencurian/perampokan
- Penyalahgunaan aset oleh pihak yang tidak
berwenang
- Kerusakan aset
- Pemalsuan
- Pemalsuan cek
- Penyelundupan
- Ketidakpatuhan/pengelakan pajak (disengaja)

External fraud
Praktek Ketenagakerjaan dan
Keselamatan Tempat Kerja
Client, Produk dan Praktek Bisnis Kerugian yang timbul sebagai akibat kegagalan Kesesuaian, pengungkapan dan
- Penyuapan/komisi ilegal
Kerugian akibat kegiatan yang termasuk Pencurian dan penipuan - Pencurian
oenipuan, penyalahgunaan properti atau - Pemalsuan
pelanggaran hukum oleh pihak ketiga Sistem Pengamanan - Pemalsuan cek
- Kerusakan akibat hacking
- pencurian informasi yang disertai dengan
kerugian dalam bentuk uang
Kerugian yang timbul dari tindakan yang tidak Hubungan karyawan - Kompensasi, benefit, masalah pemebrhentian
konsisten dengan ketenagakerjaan, dari Lingkungan kerja yang aman - Aktivitas buruh yang terorganisasi
pembayaran klaim kecelakaan pekerja, atau dari Pembedaan dan diskriminasi - Kewajiban umum
kejadian diskriminasi - Kesehatan pekerja dan kejadian peraturan
keamanan
- Kompensasi pekerja
- Seluruh bentuk diskriminasi
- Pelanggaran penjaminan/pedoman
yang tidak disengaja atau lalai untuk memenuhi penjaminan - Masalah kesesuaian/pengungkapan (KYC, dsb.)
kewajiban profesional terhadap klien tertentu
(termasuk penjaminan dan kesesuaian - Pelanggaran pengungkapan kepada nasabah ritel
persyaratan), atau akibat sifat atau rancangan
- Pelanggaran kerahasiaan
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 LOGO LOSS DISTRIBUTION APPROACH (LDA)

Under this approach, the bank estimates, for each business

line/risk type cell, the probability distributions of the severity
(single event impact) and of the one year event frequency using
its internal data

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 16

 LOGO LDA – ACTUARIAL MODEL

 LDA = a statistical/actuarial approach for computing aggregate loss

distribution. (Klugman, Panjer and Willmot [1998])
Under the Loss Distribution Approach, the bank estimates, for each business
line/risk type cell, the probability distribution functions of the single event
impact and the event frequency for the next (one) year using its internal
data, and computes the probability distribution function of the cumulative
operational loss.
(Basel Committee on Banking Supervision, Operational Risk —
Consultative Document, Supporting Document to the New Basel Capital Accord,
January 2001)

 LDA as an estimate of the distribution of operational risk losses for each

business line/event type, based on assumptions of frequency and severity of
events.  to obtain a probability distribution aggregated losses.
 The difference between LDA and the IMA is that LDA estimates unexpected
losses directly, without an assumption about the rasio between expected
and unexpected losses.
Dr. Pamuji G. Raharjo – Program MM FEB UI / 2020 Page 17
 LOGO QUALITATIVE CRITERIA – LDA

 Capturing infrequent but severe event.

 Five years of loss data

 Disciplined override process

 Extensive stress and scenario testing

 Disciplined incorporation of external data

 99.9 percent level of confidence and one-year holding period

 Correlations may be taken into account.

 Benefits of insurance may be considered

 Qualitative adjustments are permitted.

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 18

 LOGO LOSS DISTRIBUTION APPROACH (LDA)

Flowchart of The LDA Model

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 LOGO LOSS DISTRIBUTION APPROACH (LDA)

The Loss Distribution Approach

Forward Looking Element
•Loss Experience
•Internal Adjust
•External Frequency and
Calculate
•Scenario Analysis (Generated) Severity
aggregated
•Business and Control Environment Distribution for
loss
scenario data
distribution
(#2)
Credible historical
Loss Data
Sufficient? Adjust capital Stress test
Frequency directly for Determine results
and Severity factors score
Internal internal capital (scenario
Distribution (#2)
Loss Data analysis #3)
external
Insufficient?
scenarios
Adjust
aggregated loss
Calculate distribution for
aggregated scenario
External loss distribution
Data distribution (#2)

Scenario Analysis
#1
(Data
Supplementation) The LDA-based Advanced Measurement Approach for Operational Risk
– Current and In Progress Practice, RMG Conference, May 29, 2003

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 20

 LOGO LOSS DISTRIBUTION APPROACH (LDA)

External Loss Event Database

Database Managed by

ORX (Operational Risk Data eXchange Association) PricewaterhouseCoopers

CERO (Consorcio Espanol de Riesgo Operacional) Spanish Banks in the ORX

GOLD (Global Operational Loss Data) British Bankers’ Association (ABA)

MORE (Multinational Operational Risk Exchange) Netrisk

DIPO (The Database Italiano Pardite Operative) Bank of Italy

Algo OpVantage FIRST Fitch Rating

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 21

 LOGO LOSS DISTRIBUTION APPROACH (LDA)

 We consider different business lines (i = 1,...,I) and event types (j = 1,...,J)

 (i,j) is the random variable which represent the amount of one loss event
for the business line i and the event type j. The loss severity distribution of
(i,j) is denoted by Fi,j.

 We assume that the number of events between times t and t + T is random.

The corresponding variable N (i,j) has a probability function pi,j. The loss
frequency distribution Pi,j corresponden to

Dr. Pamuji G. Raharjo – Program MM FEB UI / 2020 Page 22

 LOGO LOSS DISTRIBUTION APPROACH (LDA)

 In LDA, the loss for the business line i and the event type between times t
and t +  is

Dr. Pamuji G. Raharjo – Program MM FEB UI / 2020 Page 23

 LOGO LOSS DISTRIBUTION APPROACH (LDA)

1 year

 Exponential
N = Frequency
 Pareto
N  Poisson () (Discrete)  Weibull
E (N) =  var =   Beta
 etc.

 Binomial
 Poisson Distribution
 Negative Binomial
 Geometric

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 24

 LOGO LOSS DISTRIBUTION APPROACH (LDA)

Operational Risk Probability Distribution  Audit Reports

 Regulatory reports
 External Reports
 Management Report
Frequency probability
distribution  Expert opinion
 Business Plans
 BPR (Business Process
Recovery)
 Operations plans
Operational Risk
Probability
Distribution

- Management interviews
Severity probability
distribution - Operations loss history

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 25

 LOGO LOSS DISTRIBUTION APPROACH (LDA)

An Example of Frequency Distribution

Jumlah Fraud Harian

Jumlah Fraud/hari Diminta:
Frekuensi Fraud
(Xi)
0 2
1. Hitung estimasi jumlah fraud per hari
1 3 dengan pendekatan distribusi Poisson ()
2 3
2. Besarnya probabilitas terjadinya satu kali
3 5
4 7
fraud pada hari kerja berikutnya
5 2 3. Besarnya probabilitas terjadinya dua kali
6 1
fraud pada hari kerja berikutnya
7 1
8 2
9 3
10 2
11 1
12 1

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 26

 LOGO LOSS DISTRIBUTION APPROACH (LDA)

An Example of Frequency Distribution

Number of Observed
Events per day Frauds

0 19
1 16
2 51
3 9
4 6
5 5
6 4
7 6
8 2
9 1
10 0
11 0
12 2
13 1
14 0
15 2

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 27

 LOGO LOSS DISTRIBUTION APPROACH (LDA)

Frequency Distribution Severity Distribution

Frequency Probability Severity Probability

0 0.6 $ 100.000 0.5

1 0.3 $ 1.000.000 0.3

2 0.1 $ 10.000.000 0.2

Frequency Distribution Severity Distribution

1 1
0.8 0.8
0.6 0.6
0.4 0.4

0.2 0.2

0 0
0 1 2 1,000
100,000 10,000
1,000,000 100,000
10,000,000
N u m b e r o f l o sse s ( p e r y e a r ) L o ss si z e ( $ 0 0 0 s)

Expected Loss….?
Operational Risk Capital Charge with Confidence Level 95%….?
Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 28
 LOGO LOSS DISTRIBUTION APPROACH (LDA)

Employment Clients, products Business

Execution. Two-dimensional model, parameters
Damage to Delivery, and
Internal Fraud External Fraud practices and
workplace safety
and business
services
physical assets
Disruption and
System failures
process estimated from loss data
management

Corporate Finance

Trading and Sales

Retail banking
Model
Commercial banking Complete and Comprehensive Loss Input
Payment and Settlement

Agency and Custody Services

Database
Asset Management
Frequency Severity
Retail Brokerage
Use model for each cell
of the BL/ET Matrix

Employment Execution. Delivery,

Clients, products and Damage to physical Business Disruption
Internal Fraud External Fraud practices and and process
business services assets and System failures
workplace safety management

Corporate Finance VAR VAR VAR VAR VAR VAR VAR

Trading and Sales VAR VAR VAR VAR VAR VAR VAR

Bank-wide Retail banking VAR VAR VAR VAR VAR VAR VAR

Commercial banking VAR VAR VAR VAR VAR VAR VAR

Operational Aggregation
Payment and Settlement VAR VAR VAR VAR VAR VAR VAR

VaR Agency and Custody Services VAR VAR VAR VAR VAR VAR VAR

Asset Management VAR VAR VAR VAR VAR VAR VAR

Retail Brokerage VAR VAR VAR VAR VAR VAR VAR

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 29

 LOGO LOSS DISTRIBUTION APPROACH (LDA)

What’s happen if we wrong in choosing of distributions?

1. Salah dalam menyusun model perhitungan risiko operasional.
2. Salah dalam menghitung kebutuhan modal untuk menutup
risiko operasional
3. Pengukuran risiko operasional dengan internal model akan
ditolak oleh regulator  standardised model

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 30

 LOGO LOSS DISTRIBUTION APPROACH (LDA)

Dr. Pamuji G. Raharjo – Program MM FEB UI / RSK.19 – 2020 Page 31

SEE U NEXT WEEK

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