Operational Risk Control with Basel II: Basic Principles and Capital Requirements (Hardcover)

Author: Dimitris N. Chorafas

Publisher: Butterworth-Heinemann

Pages: 388

Amazon Price:
  $82.27 

Amazon Link:http://www.amazon.com/Operational-Risk-Control-Basel-Requirements/dp/0750659092/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1204692661&sr=8-1

Contents
Foreword xi
Preface xv
Acknowledgements xix
Part 1
:Operational risk is present at any time in every enterprise 1
1 Management control of operational risk 3
1.1
Introduction 3
1.2
The presence of operational risk in an organization 4
1.3
The management of operational risk events 8
1.4
Supervisory response to operational risk 11
1.5
A strategy for bringing operational risk under control 14
1.6
Operational risk must be managed at all organizational levels 18
1.7
Turning operational risk control into a senior management tool 21
2 Classification, identification and monitoring of operational risk 26
2.1
Introduction 26
2.2
Basel Committee directives in understanding operational risk 27
2.3
Classification of operational risks and the Basel Committee 30
2.4
A classification and identification system for operational risks 32
2.5
The Chorafas parallel code system as an organizational
infrastructure 35
2.6
Quantitative and qualitative approaches to operational risk
identification 37
2.7
A framework for monitoring operational risk 40
2.8
The art of operational risk modeling 42
2.9
The role of internal control and auditing in operational risk
management 44
3 Legal risk 49
3.1
Introduction 49
3.2
Back to basics: the definition of tort 50
3.3
Responsibilities resulting from legal risk 52
3.4
Contractual aspects of legal risk 55
3.5
Crossborder legal risk and bankruptcy laws 58
3.6
Legal risk may be an impediment to a solution to a banking crisis 61
3.7
Huge credit losses, securitized corporates and legal risk 63
3.8
Compliance risk: a case study with the Year 2000 problem 66
4 Management risk 70
4.1
Introduction 70
4.2
Management risk in the power crisis in the United States 71
4.3
The changing nature of energy business calls for high grade
management skill 74
4.4
An operational risk which morphs into major credit risk 76
4.5
The derivatives losses of EDS: a different management risk 78
4.6
Management risk at Tyco International 82
4.7
The CEO should be an example of virtue, not of malfeasance 85
4.8
Conflicts of interest: from IPOs to disappearing technology firms 87
5 Information technology risk 90
5.1
Introduction 90
5.2
Technology risk defined 91
5.3
The growing role of IT and its risks 95
5.4
Advanced IT solutions and smart environments 98
5.5
Business continuity and IT-related operational risk 102
5.6
System reliability should always be a major objective 105
5.7
Trading, payments, settlements, and operational risk associated
to IT 109
5.8
Operational risks that may result from IT outsourcing and
insourcing 111
Part 2
:Capital requirements for operational risk and Basel II solutions 115
6 Allocation of capital to operational risk according to Basel II 117
6.1
Introduction 117
6.2
Regulatory capital vs economic capital 118
6.3
Economic capital and levels of confidence 120
6.4
A bird’s-eye view of models for operational risk reserves 124
6.5
The choice among methods for operational risk modeling 128
6.6
Capital standards and operational risk control costs 131
6.7
Allocating regulatory capital and economic capital to operational
risk 133
6.8
Capital at risk with operational type losses: a case study 135
6.9
Operational risk control at the Erste Bank 138
7 Five models by the Basel Committee for computation of operational risk 141
7.1
Introduction 141
7.2
The effort to measure operational risk and the basic indicator
approach 142
7.3
Capital charges under the Basel Committee’s standard approach 145
7.4
The effort to develop advanced measurement approaches 150
7.5
Capital allocation with the loss distribution approach 152
7.6
Databasing and datamining information on operational risks 156
7.7
Early findings with operational risk models, and the notion of
model risk 159
8 High frequency events, low frequency events and the Six Sigma method 163
8.1
Introduction 163
8.2
Understanding the concepts of high frequency and low frequency
events 164
8.3
Characteristics of high frequency and low frequency events 168
8.4
Experimentation and system design for operational risk control 170
8.5
Tools most useful in the analysis of operational risks 174
8.6
Using Six Sigma to improve management control over operations 177
8.7
The practical applications of Six Sigma are convincing 180
9 Market discipline, contrary opinion and scoreboard solutions 184
9.1
Introduction 184
9.2
The Basel Committee on scoreboards and market discipline 185
9.3
The use of templates with scoreboards 188
9.4
Developing more sophisticated scoreboard practices 191
9.5
Extreme value theory and genetic algorithms for operational risk
control 195
9.6
A common project on operational risk by a group of financial
institutions 198
9.7
A devil’s advocate in operational risk management 202
Part 3
:Control of technical risk and operational risk in the insurance
industry 207
10 The science of insurance and the notion of technical risk 209
10.1
Introduction 209
10.2
The science of insurance 210
10.3
Definition of risk factors and their aftermath 213
10.4
Underwriting risk in insurance and the actuaries 216
10.5
Assets held by insurers and their risks 219
10.6
The insurance of operational risk and its underwriting 223
10.7
Services provided by reinsurance: a proxy for insurance of
operational risk 226
11 The use of insurance policies to mitigate operational risk 230
11.1
Introduction 230
11.2
Cost of equity, cost of debt, and cost of insurance 231
11.3
Operational risk securitization and moral hazard 233
11.4
Advent of insurance-linked protection vehicles and underwriters
risk 237
11.5
Integrative approaches through alternative risk transfer (ART) 240
11.6
Frequency and impact of events in operational risk transfer
through insurance 243
11.7
Insurers who don’t do their homework get burned 245
11.8
Challenges with value accounting in the insurance business 247
viii Contents
12 Role of rating agencies in the creditworthiness of insurance firms 251
12.1
Introduction 251
12.2
Independent rating agencies, their business and their role 253
12.3
Insurance companies and independent rating agencies 255
12.4
Qualitative and quantitative approaches to rating insurance
companies 259
12.5
Information is the critical product of rating agencies 262
12.6
Analytical studies are the way of being in charge of risks 266
12.7
Operational risk with marine insurance underwriting:
a case study 268
13 Tort is technical and operational risk of insurers 274
13.1
Introduction 274
13.2
Why tort reform is necessary 275
13.3
Learning from the precedent of Y2K tort 277
13.4
Compensation for claims: a case study with asbestos 279
13.5
Asbestos claims have been a nightmare to the insurance industry 281
13.6
Challenges facing major financial institutions and their daily
business 284
13.7
Tort exposure and management risk correlate 287
14 The challenge of terrorism and insurer of last resort 290
14.1
Introduction 290
14.2
Business disruption resulting from 9/11 292
14.3
Learning from technical limits with insurance of natural
catastrophes 294
14.4
Policies for rethinking insurability of operational risks 298
14.5
Benefits catastrophe bonds might provide 301
14.6
Lloyd’s record losses with 9/11: a prognosticator of future
red ink? 303
14.7
Governments as insurers of last resort: a precedent with
deposit insurance 307
Part 4 The importance of cost-consciousness in operational risk control 311
15 Deficient cost control is the result of management risk 313
15.1
Introduction 313
15.2
The low cost producer holds the upper ground 314
15.3
Alert companies are in charge of their risks and of their costs:
Berkshire and TIAA 319
15.4
An example of controllable technology spending 322
15.5
Isaac Newton appreciated that throwing money at the problem
leads nowhere 324
15.6
Putting into action a costing and pricing mechanism for
operational risk control 328
16 Cost control is indivisible from operational risk management 331
16.1
Introduction 331
16.2
The cost of staying in business 332
16.3
Operational risk control and the administrative budget 334
16.4
Are mergers and disinvestments a good way to cut costs? 338
16.5
Why fat executive options work against shareholder value 341
16.6
What it means to be in charge of re-engineering 343
16.7
Establishing and sustaining a transnational advantage 346
16.8
Capitalizing on the evolving role of financial instruments 348
Index 351

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