29 July 2009

BIS paper on operational risk

These papers show how to further understand both supervisors and banking institutions with regard to outstanding issues in measurement and management of operational risk and they promote consistency with these issues across all jurisdictions. 

The Basel Committee on Banking Supervision (BCBS) released two papers relating to operational risk: Results from the 2008 Loss Data Collection Exercise for operational risk and Observed range of practice in key elements of Advanced Measurement Approaches (AMA).

The objectives of the work underlying these papers were to further the understanding of both supervisors and banking institutions regarding outstanding issues in the measurement and management of operational risk and to promote consistency in addressing these issues across jurisdictions. The work will facilitate comparative analysis of banking institutions across jurisdictions by benchmarking losses at the national/regional and international levels and by assessing capital levels relative to internal data and scenario analysis.

Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, said, "The management and measurement of the evolving field of operational risk has made significant progress as firms continue their implementation and learn from experiences in developing the modelling techniques. These two papers will help both supervisors and firms by allowing for the benchmarking of internal processes and promoting convergence. Work in this area should and will continue so as to further refine this field of risk management."

The 2008 LDCE is the first international effort to collect information on all four data elements that are used in the AMA – internal loss data, external loss data, scenario analysis and business environment and internal control factors (BEICFs).

Some of the paper’s main findings are below:

 

• Overall, banks have made considerable progress in the collection and use of internal loss data since the previous international LDCE was conducted in 2002.

• The frequency of internal losses of €20,000 or more varies significantly across regions when the data are scaled by various exposure indicators.

• Despite the regional variation in loss frequency noted above, there is some consistency in the severity distribution of operational losses across regions.

• Most banks’ scenario data extends the tail of the loss distribution beyond the point at which they have experienced internal losses. At many banks the number of scenarios greater than €10 million is approximately twenty times larger than the number of internal losses that are greater than this amount.

• Although the number of large scenarios significantly exceeds the number of large internal losses, for AMA banks the frequency of large losses implied by scenarios and internal data are broadly consistent.

• AMA banks have a higher frequency of internal losses greater than €100,000 than than

non-AMA banks, even when the data are scaled by exposure indicators.

 

The paper on range of practice (ROP) is an update of the 2006 report of the same name. The 2006 report described the practices that BCBS members had observed in relation to some of the key internal governance, data and modelling challenges that faced the industry.

Since the publication of the 2006 report, the Basel Committee has seen a considerable evolution in the risk measurement and risk management practices associated with the operational risk discipline in general and in the AMA more specifically. These evolutionary changes have had a marked effect on how AMA banks address key internal governance, data and modelling challenges. The BCBS initiated the 2008 ROP update of the 2006 report to evaluate these changes, promote further maturation of industry operational risk practices and further engage the industry in maintaining high standards for acceptable practice.

 

Press release

Results from the 2008 Loss Data Collection Exercise for operational risk

Observed range of practice in key elements of Advanced Measurement Approaches

 

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