Operational and Integrated Risk

Management

讲师：

网址： WWW.GFEDU.NET
电话： 400-700-9596
 Total Framework

Operational Risk

Operational and Integrated

Capital Management
Risk Management

Integrated Risk Management

Operational Risk
Operational Risk ★★★ 性质
Definition Risk of loss resulting from inadequate or failed internal process, people
and systems or from external events.
① Include: legal Risk
② Exclude: strategic and reputation risk
Loss Event Types ★★★ 性质
Concept
Measuring Operational Risk - Loss
★★★ 性质
Distribution Approach (LDA)
Frequency 1. The alternatives for the frequency distribution are:
Distribution ① Binomial
② Poisson
③ Negative Binomial
2. It is entirely possible that there is either no loss event at all in the
internal dataset for some units of measure or the frequency appears
abnormally low. Therefore, data requirement:
① internal loss data,
② external data (consortium data is more useful than publicly
available external data)
③ scenario datasets.
Severity Distribution ★★ 性质
Severity 1. The alternatives for the severity distribution are:
Distribution ① Lognormal
② Weibull
③ Gamma
④ Exponential
2. One of the well-known data biases is that internal datasets are
typically biased toward low severity losses. The operational risk
capital, on the other hand, is meant to absorb low frequency large
(high severity) losses. Using the internal dataset alone for the
estimation of severity distribution is thus likely to produce too low
operational risk capital.
Frequency and Severity Distributions
★★★ 性质
(Parametric-based LDA)
Characteristic Four of the distributions being considered are light-tailed (Exponential,
Weibull, Gamma and Lognormal), and the remaining five distributions
are heavy-tailed (LogGamma, Pareto, GPD, Burr and Loglogistic).
Data Problems ★★★ 性质
Concept Internal Data
① Internal loss dataset for a bank may not be long enough to allow
reliable estimation of the parameters of the frequency and
severity distributions from the internal dataset alone. This
elevates the importance of scenario/workshop data.
② When a bank acquires another banking operation, the assimilation
of the two pre-acquisition internal datasets can pose challenging
issues. For example, their data collection thresholds and units of
measure may vary.
Data Problems ★★★ 性质
Concept External Data
① It is often problematic to compensate with scenario and/or
external data since external data may not be representative of the
bank’s operational risk profile. The issue is, “do past loss events at
other institutions seem likely or even plausible for the user bank
going forward?”
② Publicly available external data has a strong bias in favor of large
and well-publicized losses.
③ The exercise of relevance-based filtering can only make this
problem worse: Relevance-based filtering may reduce bias by
eliminating irrelevant data points, but increase variance due to
potential filtering error and clearly fewer data points.
④ Unless the size differential is properly accounted for, the frequency
and severity distributions for a bank of a specific size could be
biased and imprecise.
The Basel operational risk charge ★★★ 性质
Equations ① Basic indictor Approach

ORCBIA   * GI
  15%
② The standardized Approach

8
ORC TSA
  i * GIi
③ Advanced measurement
1 Approach

ORCAMA  UL(1  year,99.9%confidence)

Normally, the EL must be included in the capital charge,

unless the bank can demonstrate that it adequately
captures EL in its internal business practice.
Model risk ★★★ 性质
Concept 1. Definition
The risk of error in our estimated risk measures due to inadequacies
(or deficiencies) in our models.
2. Sources of Model Risk
Incorrect Model Specification includes:
① Misspecification of stochastic processes.
② Missing risk factors.
③ Misspecification of relationships between variables.
④ Ignore (omit) transaction costs, crisis and liquidity factors.
Model risk ★★ 性质
Concept 1. Incorrect Model Application includes
① We apply the wrong model.
② We might correctly employ a Monte Carlo simulation, but we might
use a faulty random number generator or run an inadequate number
of trials.

2. Implementation Risk
Includes decisions required in applying the model; Models are
becoming increasingly complex, so many “user decisions” must be
made in regard to application of the model.
Model risk ★★ 性质
Concept 3. Incorrect Calibration
① Parameters might be estimated with error, not kept up to date,
estimated over inappropriate sample periods.
② Risk Models are also prone to calibration problems, particularly
with the estimation of volatility and correlation. When volatility
rises unexpectedly, firms tend to experience higher losses than
suggested by their risk models, because ‘true’ volatility is higher
than previously estimated volatility, and a highly publicized
example was the experience of LTCM.
Ways Risk Managers can Protect against Model Risk ★★★ 性质
Concept ① Be aware: be aware of model limitations, comparative strengths and
weaknesses and inappropriate applications.
② Identify, evaluate and check key assumptions: users must be explicit
about their model assumptions.
③ Test models against known problems
④ Choose the simplest reasonable model.
⑤ Back-test and stress test
⑥ Estimate model risk quantitatively
⑦ Don’t ignore small problems.
⑧ Plot results and use non-parametric statistics
⑨ Re-evaluate models periodically
Transaction Liquidity Risks ★★★ 性质
Factors that ① Number of traders in the market.
Influence ② Frequency and size of trades.
Liquidity ③ Time it takes to carry out a trade.
④ Cost of transacting.
⑤ Liquidity is also a function of the position or instrument traded.
Exchange-traded positions (e.g., FX) have more liquid markets than
OTC.

Bid-Ask Spread ① Higher ASK Price: price at which a trader sells.

as a Measure of ② Lower BID Price: price at which trader buys.
Liquidity ③ The difference between the bid and ask prices is a cost of liquidity.
Liquidity – Adjusted VaR ★★★ 性质
Key Points Exogenous Price Approach （外生）
Of VaR Constant Spread Approach – Normal VaR

 ask price  bid price 

LC  0.5  V  spread spread 
 ask price  bid price  2

LVAR   V  z       0.5  V  spread

Where:
V = asset (or portfolio) value
zα = confidence parameter
σ = standard deviation of return
Liquidity – Adjusted VaR ★★★ 性质、计算
Key Points ① Constant Spread Approach - Lognormal VaR

VAR  1  exp      z     V

of VaR

LVAR  1  exp      z     V  0.5  spread  V

② Assumption: μ

LVAR spread
 1
VAR 2  1  exp    z   
③ Indicate that the liquidity adjustment will increase (decrease) when
there is an increase (decrease) in the spread, a decrease (increase) in
the confidence level, and a decrease (increase) in the holding period.
Liquidity – Adjusted VaR ★★★ 性质、计算
Key Points Random Spread Approach – Normal VaR
of VaR ① If bid–ask spreads vary substantially, the above equation can be
adjusted to account for the worst increase in spread at some
confidence level.

②Where zLVAR  VAR  0.5   value

s  z s
istobe V
determined.
α’is some parameter whose A
particular value (zα’= 3) is plausible because it reflects the empirical
facts that spreads appear to have excess kurtosis.

Lognormal Random Spread Approach – Lognormal VaR

VaR
  
LVAR  V  1  exp      z     0.5   S  z '   S  
LVAR LC  S  z  S 
 1  1
VAR VAR 2  1  exp    z  
Endogenous Price Approach （内生） ★★★ 性质
Topics ① If the market is likely to respond to the trade itself, an endogenous
approach is appropriate.
② For larger transactions, asset liquidity can be assessed by a price-
quantity function, called market impact, which describes how the
price is affected by the quantity transacted.

Equation P P
Elasticity  E  
N N
N N  size of the trade relative to the entire market
 P   N 
LVaR  VaR   1   VaR  1  E 
 P  
 N 
LVaR N
 1 E 
VaR N
Liquidity Risks of Commercial Banking ★★★ 性质
Topics Fragility of Commercial Banking
Equation ① In a fractional-reserve banking system, if depositors wish to make
withdrawals in excess of a bank’s reserves, and the bank cannot
liquidate enough loans or other assets to meet the demand
immediately, it is forced into suspension of convertibility.
② As the extreme, all or a large number of depositors may ask for the
return of their money simultaneously, an event called a bank run.
③ Apart from deposits, banks are generally dependent on short-term
financing, exposing them to rollover risk events that, while less extreme
than runs, can be costly or increase fragility. Rollover risk is the risk that
the short-term debt cannot be refinanced, or can be refinanced only on
highly disadvantageous terms.
Repurchase Agreements and Financing ★★ 性质
Repo Using the actual/360 convention of most money market instruments,
and noting that there are 92 days between May 31, 2010, and August
31, 2010, is 92, the repurchase price is:

 0.23%  92 
€111,772,000  1    €111,837,697.10
 360 

Graph
€100 mm Face of
DBR 4s of 1/4/2037

Counterparty A Counterparty B

€111,837,697.10
Repurchase Agreements and Financing ★★ 性质
Repo Repos and Cash Management
① A money market fund would be in the position of counterparty
B, lending money while taking collateral and then, at maturity,
collecting the loan plus interest and returning the collateral.
② Municipalities constitute another significant category of repo
investors. Other institutions with similar cash management
issues that choose to invest in repo are mutual funds, insurance
companies, pension funds, and even some nonfinancial
corporations.
③ Repo investors tend to lend overnight, rather than for term.
Repurchase Agreements and Financing ★★ 性质
Repo ④Repos and Lending Financing
Financial institution used the repo market to finance its inventory
for purpose of making markets.
⑤Reverse Repos and Short Positions
Repo investment and reverse repos, the former are initiated in
order to invest cash while the latter are initiated to borrow a bond.
While repo investors are willing to accept general collateral,
reverses require the delivery of a particular bond. Repo
transactions that require the delivery of a particular bond are called
special trades and they take place at special collateral rates.
Principles for the Sound Management of Operational Risk ★★★ 性质
Three Lines of ① Business line management: This means that sound operational risk
Defense governance will recognize that business line management is responsible for
identifying and managing the risks inherent in the products, activities,
processes and systems for which it is accountable.
② Functionally independent corporate operational risk function (CORF): This
function may include the operational risk measurement and reporting
processes, risk committees and responsibility for board reporting. A key
function of the CORF is to challenge the business lines’ inputs to, and
outputs from, the bank’s risk management, risk measurement and reporting
systems.
③ Independent review and challenge of the bank’s operational risk
management controls, processes and systems.
Principles for the Sound Management of Operational Risk ★★★ 性质
Topics Managing Technology Risk and Outsourcing Risk
① Sound technology risk management uses the same precepts as
operational risk management
② Outsourcing is the use of a third party – either an affiliate within
a corporate group or an unaffiliated external entity – to perform
activities on behalf of the bank.
Capital Management
RAROC ★★★ 性质、计算
Risk-Adjusted
Return on Risk-Adjusted Return
Risk-Adjusted Return on Capital  RAROC  
Capital Economic Capital  EC 
(RAROC)

Risk-Adjusted Risk-adjusted return is composed of revenues plus return on economic

return capital minus expenses for the given business activity, minus expected
losses.

RAR  Re venues  Re turn on EC  Expenses  EL

Economic capital measures the capital required to absorb the
unexpected loss.
Capital for Market Risk ★★★ 性质、计算
Key Points 1. The approach to allocating RAROC capital for market risk has evolved to
attributing RAROC capital as a function of the amount of risk expressed in the
value-at-risk calculation.
2. Further, practitioners often charge RAROC capital as a function of both unused
market risk limits and penalties for exceeding limits.
Example:

market risk capital charge

=F1 ①
VARF  = aF2constant
max  VAR
that limit  VAR,
adjusts 0 day-to-day
for the  VARrisk VAR
  F3 maxevent limit, 0  in
not captured 
1

the VAR model.

② F2 = multiplier used to determine the charge for the unused portion of the
VAR model.
③ F3 = multiplier used to determine the charge for exceeding the VAR limit.
ARAROC ★★★ 性质、计算
Characteristic 1. RAROC is sensitive to the level of the standard deviation of the
risky asset. RAROC is sensitive to the correlation of underlying
asset’s return and the market portfolio. If a fixed hurdle rate is
used in conjunction with RAROC, high-volatility and high-
correlation projects will tend to be selected.
2. The second-generation RAROC is called Adjusted RAROC
(ARAROC) and ARAROC overcomes these problem.

RAROC  RF
ARAROC
①.βE is the  risk of equity.
systematic
E
②.The project should be accepted if the adjusted RAROC
exceeds the market’s equity risk premium.
Integrated Risk Management
Enterprise Risk Management ★★ 性质
Introduction Create Shareholder Value both at the Macro and the Micro Level
① At the Macro level
ERM enables senior management to quantify and manage the risk-
return tradeoff that faces the entire firm. This helps (i) maintain access
to capital markets, (ii) implement strategy and business plan.
By reducing non-core exposures, ERM effectively enables companies
to take more strategic business risk and to take greater advantage of
the opportunities in their core business.
② At the Micro level
Well-designed ERM system ensures that all material risks are owned
(“becomes a way of life for managers and employees”).
Operating managers and employees can evaluate risk-return tradeoff.
Failure Mechanics of Dealer Bank ★★ 性质
Introduction Dealer banks are entities that purchase and sell government or agency
securities. A dealer bank may be a commercial bank that specializes in the
sale of these types of securities, or a department of a bank that is
devoted to handling the sale and purchase of various types of municipal
securities. The bank or bank department has full authority to underwrite
just about any type of government issued debt securities, including
municipal bonds.

Major ① Securities dealing, underwriting, and trading

Functions of ② OTC derivatives
Large Dealer ③ Prime brokerage and asset management
Banks ④ Off-balance sheet financing
Stress Test ★★ 性质
Topics ① The US entered 2009 with enormous uncertainty about the health of its
banking system. So under the Supervisory Capital Assessment Program or
SCAP, with a credible assessment of losses under a sufficiently stressful
macroeconomic scenario, all banks with assets greater than 100bn conducted
stress test. And ten of the 19 SCAP banks were required to raise a total of 75bn
in capital within six months
② The SCAP was the first of the macro-prudential stress tests of this crisis. With
the SCAP, stress testing at banks .
Op-Risk Data and Governance ★★★
性质、计算

Introduction Taxonomy: classification of risks

①There are roughly three ways that firms drive this risk

taxonomy exercise: cause-driven, impact-driven, and event-driven.

②Cause driven method: the risk classification is based on the

reasons that cause operational losses.

③Impact-driven method: the classification is made according to

the financial impact of operational losses.

④Event-driven method: classifies risk according to Op-Risk

events.
Op-Risk Data and Governance ★★★ 性质、计算

Introduction Execution, Delivery, and Process Management

① EDPM loss event type is one of t he most prominent in the Op

Risk profile of firms or business units with heavy transaction

processing and execution businesses.

② It encompasses losses from failed transaction processing, as

well as problems with counterparties and vendors.

③ Knowing where these errors occur is very important for

operation risk management.

Op-Risk Data and Governance ★★★ 性质、计算

Introduction 1. Clients, Products, and Business Practices

① Loss events under Clients , Products and Business Practices
(CPBP) risk type are usually the largest.
② It encompasses losses from disputes with clients and
counterparties, regulatory fines from improper business
practices, or wrongful advisory activities.
2. Business Disruption and System Failures
Business Disruption and System Failures (BDSF) event type is
one the most difficult to spot in a large organization, eg, a system
crash.
Op-Risk Data and Governance ★★★ 性质、计算

Introduction ①External Frauds

External frauds are frauds committed or attempted by third parties

or outsiders against the firm. Examples would be system hacking and

check and credit card frauds.

②Internal Fraud

Internal frauds are frauds committed or attempted by a firm‘s own

employees. It is one of the less frequent types of Op-Risk loss.

Op-Risk Data and Governance ★★★ 性质、计算
Introduction ①Employment Practices and Workplace Safety
Employment Practices and Workplace Safety (EPWS) type of risk is
more prominent in the Americas than Europe or Asia as either the
labor laws are old-fashioned and/or there is more a culture of litigation
against the employers.
②Damage to Physical Assets
The most common method to assess the exposure to this risk is
through scenario analysis using insurance in formation. Very few firms
actively collect losses on this risk type as these are usually either too
small or incredibly large.