Preface xiii
Acknowledgments xv
Chapter 1 Definition and Drivers of Operational Risk 1
The Definition of Operational Risk 1
2012 London Olympics: A Case Study 5
Operational Risk Management and Operational Risk Measurement 9
Drivers of Operational Risk Management 13
Key Points 14
Review Questions 14
Notes 15
Chapter 2 The Regulatory Push 17
History of the Basel Accords 17
Rules of the Accords 22
Adoption of Basel II in Europe 27
Adoption of Basel II in the United States 27
Impact of the Financial Crisis 29
Basel III 34
Key Points 36
Review Questions 36
Notes 37
Chapter 3 The Operational Risk Framework 39
Overview of the Operational Risk Framework 39
The Foundations of the Framework 40
The Four Data Building Blocks 42
Measurement and Modeling 44
Reporting 44
Risk Appetite 45
Key Points 45
Review Questions 46
Note 46
Chapter 4 Operational Risk Governance 47
Role of Governance 47
First Line of Defense 50
Second Line of Defense 51
Third Line of Defense 63
Risk Committees 66
Key Points 68
Review Questions 69
Notes 69
Chapter 5 Culture and Awareness 71
Winning over the Firm 71
Marketing and Communication 72
Agile 73
Training 75
Planning 76
The “Use Test” 82
Key Points 84
Review Question 84
Note 84
Chapter 6 Policies and Procedures 85
The Role of Policies, Procedures, Guidelines, and Standards 85
Best Practices 88
Operational Risk Policy 88
Sample Operational Risk Policy 89
Sample Standards, Procedures, and Guidelines 95
Key Points 97
Review Question 97
Note 97
Chapter 7 Internal Operational Risk Event Loss Data 99
Operational Risk Event Data 99
Internal Loss Data or Internal Operational Risk Events 100
Risk Event Categories 103
Using the Basel Risk Categories 112
Minimum Operational Risk Event Data Standards 113
Where Should Operational Risk Event Data Be Collected? 129
When Should Operational Risk Event Data Be Collected? 130
How Should Operational Risk Event Data Be Collected? 130
Key Points 132
Review Questions 132
Notes 134
Chapter 8 External Loss Data 135
External Operational Risk Event Data 135
Sources of External Loss Event Data 136
Challenges of External Data 139
Key Points 147
Review Question 148
Notes 148
Chapter 9 Key Risk Indicators 149
Key Risk Indicators 149
Selecting Kris 153
Thresholds 154
Kri Standards 154
Kri Challenges 155
Metrics Examples 155
Key Points 161
Review Question 161
Note 161
Chapter 10 Risk and Control Self-Assessments 163
The Role of Assessments 163
RCSA Methods 166
RCSA Scoring Methods 169
RCSA Best Practices 173
Key Points 178
Review Question 179
Note 179
Chapter 11 Scenario Analysis 181
Role of Scenario Analysis 181
Scenario Analysis Approaches 183
Scenario Analysis Output 192
Key Points 195
Review Questions 195
Notes 196
Chapter 12 Capital Modeling 197
Operational Risk Capital 197
Basic Indicator Approach 199
Standardized Approach 202
Advanced Measurement Approach 208
Insurance 221
Future of Capital Requirements: Basel III 223
Key Points 235
Review Questions 236
Notes 236
Chapter 13 Reporting 239
Role of Reporting 239
Operational Risk Event Reporting 241
Risk and Control Self-Assessment Reporting 247
Key Risk Indicator Reporting 248
Scenario Analysis Reporting 249
Capital Reporting 249
Action Tracking Reporting 250
A Consolidated View 253
Dashboards 253
Key Points 253
Review Question 255
Chapter 14 Risk Appetite 257
The Role of Risk Appetite 257
Regulatory Expectations 259
Implementing a Risk Appetite Framework 264
Monitoring Operational Risk Appetite 268
Risk Appetite Today 272
Key Points 272
Review Question 273
Notes 273
Chapter 15 Reputational Risk and Operational Risk 275
What Is Reputational Risk? 275
Reputational Impact 277
Regulatory Oversight of Reputational Risks 283
Reputational Risk Management Framework 284
Key Points 289
Review Question 289
Notes 290
Chapter 16 Operational Risk and Convergence 291
Operational Risk as a Catalyst for Convergence 291
Governance, Risk, and Compliance (GRC) 292
Converged or GRC Reporting 301
Key Points 302
Review Question 303
Notes 303
Chapter 17 Best Practices in Related Risk Management Activities 305
New-Product Approval 305
Supplier and Third-Party Risk Management 306
Legal Risk Management 307
Regulatory Risk Management 308
People Risk Management 308
Fraud Risk Management 309
Technology Risk Management 310
Climate Risk 311
Pandemic Planning 312
Strategic Risk 314
Key Points 316
Review Question 317
Notes 317
Chapter 18 Case Studies 319
JPMorgan Whale: Risky or Frisky? 319
Review Questions 324
Notes 339
Appendix: Answers to Review Questions 341
About the Author 351
About the Website 353
Index 355
