Operational Risk Management Masterclass

2 days
Prague, NH Hotel Prague
   Learning Objectives
  • UNDERSTAND the drivers of change in the risk landscape that exposed failings in today's operational risk management tools and techniques with catastrophic consequences
  • STRUCTURE a comprehensive, value-added operational risk exposure measurement systém and management framework
  • EVALUATE the directional tendencies of regulatory reform with particular focus on new Basel Committee requirements aimed at improving the quality of risk data with aggregation capabilities
  • LEARN how new operational risk quantification techniques can facilitate the setting and monitoring of risk appetite, capital calibration and scenario analysis
  • BUILD a ‘DNA of Operational Risk Quantification' template that can be used to provide a diagnostic of your bank's risk measurement methods and systems
Course Description

Financial firms construct operating environments comprised of manual and automated processes that interact with data with the aim of maximizing operating efficiency and minimizing exposure to operational risk. Today's operational risk management tools and techniques are essentially assessment and indicator based and typically report risks using non-quantitative ‘RAG' (red – amber - green) indicators. Such tools and techniques are failing operating management, boards, investors and other stakeholders due to their inability to produce explicit, comprehensive and dynamic measurements of operational risks in financial firms as they occur and accumulate.

The clock is ticking on today's operational risk management approaches. The global regulators (Basel) are demanding improvements and, most significantly, they are expecting banks in the near future to be able to reconcile their risk data to the firm's general ledger and aggregate it to the top of the firm. That means that, among other things, financial firms will need to implement methods of explicitly and dynamically measuring exposures to operational risks.

By attending this course you will find out how it can be done.

Course Structure

The course is designed as a combination of classroom lectures supplemented by interactive discussions and practical case studies to illustrate solutions to the problems faced in practice.

09.00 - 09.15 Welcome and Introduction

Session 1: The Current Risk Landscape and State of Operational Risk Management

  • Analyzing the drivers of change in the risk landscape in which banks operate and the implications for operational risk management
  • The essentials of effective risk quantification
  • The DNA of risk measurement... simple tests that can be applied to evaluate the reliability of risk models and other risk quantification techniques

Case study and exercise: Delegates analyze the risk environment in which their firms operate and identify the principal threats that could give rise to material unexpected losses

Session 2: An Examination of Conventional Operational Risk Management Tools & Techniques

  • Today’s operational risk management toolkit… what are the alternative approaches, best practices, benefits and limitations:
    • Process & control mapping
    • Risk & control self assessments
    • Risk registers
    • Key risk indicators (KRIs)
    • Loss distribution analysis
    • Scenario analysis and stress testing
    • Causal modeling

12.00 - 13.00 Lunch

Session 3: Internal Loss Data Capture

  • Understanding the importance of loss event capture and what it is used for
  • Designing a loss event database… minimum data requirements
  • Sample loss event categorizations and their treatment in the loss event database
  • How to calculate the financial impact of loss events
  • A summary of the Basel II loss event types
  • Understanding the boundaries between operational risk loss events and market and credit risk loss events

Case study and exercise: Delegates are provided with operational risk event / loss scenarios which they analyze and then determine the applicable Basel II loss event category and what data should be recorded in the loss event database.

Session 4: Deconstructing & Analyzing the Operating Environment as a Prerequisite to the Implementation of an Operational Risk Reporting Framework

  • What is a business component and how should they be categorized relative to the creation of an operational risk reporting framework:
    • Transaction processing units
    • Risk management functions
    • Reference data maintenance units
    • Business applications (IT) maintenance units
    • Administration & support functions
  • Understanding the three pillars of business components and how their flawed interaction creates exposure to risk:
    • Manual processes
    • Automated processes
    • Data
  • Understanding the correlation between risk and efficiency and establishing the benchmark for optimal operating environments
  • Measuring deviations from the benchmark and the consequences for operational risk management

Case study and exercise: Introducing and reviewing the ‘Safe Bank’ case study that will be further used on Day 2. Delegates analyze and critique Safe Bank’s business operating model.

Day Two

Session 5: The Basel Operational Risk Framework and Why It Failed to Prevent Losses

  • The evolving capital accords in relation to operational risk management
  • Basel II requirements for operational risk
    • Basic Indicator Approach
    • Standardized Approach
    • AMA Requirements
  • An overview of the BCBS sound practices papers:
    • Principles for the sound management of operational risk
    • Supervisory guidance for the advanced measurement approaches
  • Industry perspectives on approaches to operational risk management: assessment vs. measurement
  • An analysis of recent major unexpected losses suffered by banks and why their operational risk management tools and techniques failed to prevent them

Session 6: Exposure to Operational Risk – New BCBS Data Aggregation Requirements

  • An overview of the BCBS consultative paper ‘Principles for Effective Risk Data Aggregation and Risk Reporting’

  • Understanding the regulators’ expectations and the implications for banks
  • The need for measurement based operational risk management systems… what are the alternatives

12.00 - 13.00 Lunch

Session 7: Constructing a Direct and Dynamic Operational Risk Exposure Measurement and Reporting System

  • Understanding how exposure to operational risk is created
  • Designing an operational risk exposure measurement system… identifying the causal factors that drive operational losses
  • The core metrics that underpin the measurement system and how they are calculated
  • Constructing the measurement system’s tables… the ‘Value Table’ and operational ‘Activity Table’
  • Translating best practice risk mitigation techniques into ‘Best Practice Scoring Templates’
  • Populating and running the operational risk quantification model

Case study and exercise: Delegates analyze a real-life business operating model and calculate quantitative and qualitative operational risk metrics that are used to produce Operational Risk MI. The outputs are subsequently evaluated and critiqued.

Session 8: The Application of the Exposure Measurement System in the Operational Risk Management and Reporting Framework

  • Reconciling operational risk data to the general ledger through ‘Risk Accounting’
  • Using the operational risk core metrics for risk appetite setting and monitoring, capital calibration and scenario analysis
  • How to associate operational risk measurements with external risk measurements (credit, market, liquidity, interest rate etc) to produce a fully integrated risk reporting system

Case study and exercise: Delegates conduct an analysis of the DNA of the new operational risk measurement system and conclude on: (1) its value-added relative to the current / Basel II approach; and (2) its risk mitigation capabilities relative to the threats of major unexpected loss identified on Day 1.

Summary, Evaluation and Termination of the Seminar

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