Brief overview of the three operational risk capital calculations allowed by Basel II and the US Fed. Also addresses the key challenges around data quality and validation.

1. RGP - Craig Williston
Operational Risk Methodology - Calculating Regulatory Capital
Timeline
 2004 Basel II Accord
 2008 Financial Crisis
 Now Race to Implement
The Federal Reserve Allows: Benefits of the AMA Model
 Basic Indicator Approach •Lower capital requirements
One Size Fits All (15% of revenue) • Based on metrics that can also be used to
 Standardized Approach manage risk
8 sizes fit all (12 - 18% of divisional revenue)
 Advanced Measurement Approach (AMA)

2. RGP - Craig Williston
Operational Risk Methodology - Calculating Regulatory Capital
Process:
 Gather historical loss data (5+ years)
 Develop Key Risk Indicators (KRI)
 Run statistical studies to determine if the KRIs can help predict
expected losses
Typical Data Challenges: Additional Challenges:
 Finding the data  Regressing the KRIs against the number of
losses to assess their suitability as a predictor
 Reconciling loss data to books & records of losses
 Gaining agreement to feed the data (daily)  Understanding the impact of new losses & KRIs
 Cleansing & enriching the data  Building a process to assess model output
quality in-flight
Future State:
 Automated Feeds
 Automated model output quality checks
 Team responsible for explaining movements
not just churning data manually