Reinventing Operational Risk Regulation for a World of Climate Change, Cyberattacks, and Tech Glitches
Proposes a new framework for regulating operational threats such as damage to physical assets, business disruption, and system failures. It suggests replacing rwa regulation with simple buffers of equity and outlines what a “macro-operational” approach to banking supervision might look like. It also acknowledges the limitations of macro-operational supervision and considers what new types of […]
Is Bank CEO Pay Sensitive to Operational Risk Event Announcements?
This study reveals how operational risk events affect US bank CEO compensation from 1992-2016. Results indicate that compensation committees take operational risk into account & that recent regulations have enhanced this process. Additionally, operational risk events have a detrimental effect on options-based compensation. Lire
The Information Value of Past Losses in Operational Risk
“We show that past operational losses are informative of future losses, even after controlling for a wide range of financial characteristics. We propose that the information provided by past losses results from them capturing hard to quantify factors such as the quality of operational risk controls, the risk culture, and the risk appetite of the bank.” Lire
The Bayesian approach to analysis of financial operational risk
“The article provides a short overview of methods for constructing mathematical models in the form of Bayesian Networks for modeling operational risks under conditions of uncertainty. Let’s provide the sequence of actions necessary for creating a model in the form of the network, methods for computing a probabilistic output in BN, and give examples of […]
Imbalanced Data Issues in Machine Learning Classifiers: A Case Study
“… the methods discussed in this paper can apply to general machine learning classifiers in applications with imbalanced data issues, by using a case study in credit card fraud detection this paper calls practitioners’ attention to the imbalanced data problems therein, where class imbalance is often mistreated and lacks theoretical discussion.” Lire
Modeling Very Large Losses.
“… we propose an approach to estimate very large losses similar to that used by Fermi and Drake to estimate the existence of extraterrestrial life. It consists of supposing the event of interest is the result of a concatenation of independent factors and estimating the probability of each factor. The problem is that the events […]
Systemic Operational Risk in the Australian Banking System: The Royal Commission
“This paper … documents some of the most prominent cases of misconduct, which it summarizes in terms of operational risk losses (using Turner’s framework for analyzing organizational disasters) and also details some egregious examples of operational risk events …” Lire
Machine Learning for Categorization of Operational Risk Events Using Textual Description
“… an overview of how machine learning can help in categorizing textual descriptions of operational loss events into Basel II event types. We apply PYTHON implementations of support vector machine and multinomial naive Bayes algorithms to precategorized Öffentliche Schadenfälle OpRisk (ÖffSchOR) data to demonstrate that operational loss events can be automatically assigned to one of […]
The Information Value of Past Losses in Operational Risk
“… the information provided by past losses results from them capturing hard to quantify factors such as the quality of operational risk controls, the risk culture, and the risk appetite of the bank.” Lire
A Text Analysis for Operational Risk Loss Descriptions
“… we have applied text analysis methodologies to extract information from descriptions in the OpRisk database. After delicate tasks like data cleaning, text vectorization, and semantic adjustment, we apply methods of dimensionality reduction and several clustering models and algorithms to develop a comparison of their performances and weaknesses. Our results improve retrospective knowledge of loss […]
How does the pandemic change operational risk? Evidence from textual risk disclosures in financial reports
“… operational risk remained the most prominent major risk type after the outbreak of Covid-19, and that disclosures of operational risk increased by 5.19% compared with the samples from before the outbreak. The drivers of operational risk also changed, with significant increases in disclosure of litigation risk, transaction modes and product and service problems as […]
Operational Risk Management of Political Risk: Evidence from Customer Concentration
“… our empirical evidence indicates that political risk significantly a firm’s operational risk strategy in terms of managing its customer concentration risk.” Lire
Sell-Side Analysts’ Assessment of Operational Risk: Evidence from Negative ESG Incidents
“We use firm-day level data from RepRisk about negative operational incidents that are classified into environmental, social, and/or governance issues. We find that analyst outputs predict negative ESG incidents, suggesting that analyst outputs contain information that is predictive of these events.” Lire
Operational Loss Recoveries and the Macroeconomic Environment: Evidence from the U.S. Banking Sector
“Our findings offer new evidence on how economic shocks transmit to banking industry losses with implications for risk management and supervision.” Lire
Bank Capital Adequacy Framework
“This paper considers the question from a non-technical point of view and surveys the regulatory requirements for capital adequacy contained in the so-called Basel framework. It analyses all contributing parts of the Capital Adequacy Ratio (CAR), including regulatory capital, credit risk, market risk and operational risk, raising in each case the concerns of the literature as well as recent […]
Correlations in Operational Risk Stress Testing: Use and Abuse
“Evidence that the COVID-19 pandemic had minimal effect on operational risk losses in 2020 is presented and the effect of model risk is emphasized. Our results show that the existence or otherwise of significant correlations depends on the regression model used, whether data series show trends, the time window concerned, geographical location and the type of financial institution.” Lire
How Climate Change May Impact Operational Risk
“… climate change may drive operational risk losses through complex interactions between three factors: changes in human and institutional behaviors, significant and rapid changes in economic metrics and direct physical impacts.” Lire
The Status of People Risk Management in UK Banks
“… some operational risk managers are working more closely with their human resources partners to develop a more cohesive approach to people risk management. In the context of current reforms to the capital requirements for operational risk” Lire
Spatial Distance and Risk Category Effects in Enterprise Risk Management Practice
“… we find the difference in decision-makers’ probability assessments between operational and non-operational risk factors is greater when assessing a proximate rather than a remote target. We contribute to the accounting literature by demonstrating how spatial distance affects probability judgments.” Lire
Flood Risk Quantification and Mapping: An Integrated Vulnerability-Based Approach at the Local Scale in New Brunswick, Canada
“The integration of data in a geographic information system enables the visualization and spatialization of risk, but also each of its components.” Lire