VRM 7. Operational Risk

Learning Objectives

1) Describe the different categories of operational risk and explain how each type of risk can arise.

2) Compare the basic indicator approach, the standardized approach, and the advanced measurement approach for calculating operational risk regulatory capital.

3) Describe the standardized measurement approach and explain the reasons for its introduction by the Basel Committee.

4) Explain how a loss distribution is derived from an appropriate loss frequency distribution and loss severity distribution using Monte Carlo simulation.

5) Describe the common data issues that can introduce inaccuracies and biases in the estimation of loss frequency and severity distributions.

6) Describe how to use scenario analysis in instances when data are scarce.

7) Describe how to identify causal relationships and how to use Risk and Control Self-assessment (RCSA), Key Risk Indicators (KRIs), and education to measure and manage operational risks.

8) Describe the allocation of operational risk capital to business units.

9) Explain how to use the power law to measure operational risk.

10) Explain how the moral hazard and adverse selection problems faced by insurance companies relate to insurance against operational risk.