Pre-conference workshop 2, Monday, March 18th, 2013, New York

Introduction to operational risk modeling Led by: Anna Chernobai, Assistant Professor, Department of Finance, Martin J. Whitman School of Management, SYRACUSE UNIVERSITY

8:30 Registration and breakfast

9:00 Basel II Capital Accord and Operational Risk Basics

  • Definition of operational risk
  • Business complexity and operational risk event types
  • Industry experience with operational risk: Key insights from real data
  • Why now? Regulatory requirements for operational risk
  • Operational risk vs. market risk and credit risk: Key differences and implications for modelling
  • Top-Down or Bottom-Up? Basic Indicator Approach, Standardized Approach, and Advanced Measurement Approach (Loss Distribution Approach)
  • Operational Value-at-Risk: Operational risk frequency and severity and putting the two together
  • "Fat tails" and why this matters

10:30 Morning coffee break

11:00 Operational Risk Modelling - Part I: Building the Foundation and Exploring the Two Building Blocks - Frequency and Severity

  • Modelling operational risk: Basic framework and simple math
  • Poisson process and simple steps to apply it to operational risk data in practice
  • Poisson process in practice: Linking operational risk to KRIs and incorporating them into the Poisson model
  • Severity distributions and why we need them
  • The issue of "fat tails," once again
  • Extreme Value Theory (EVT) and why we need it
  • Challenges of EVT: When it works and when it doesn't work

12:30 Lunch

Operational Risk Modelling - Part II: Developing a Robust Operational Risk Capital Charge Measurement Technique

  • Operational risk frequency + severity = operational risk capital charge
  • A simple algorithm to compute Value-at-Risk (VaR)
  • Validation and making sure it works
  • Challenges of VaR: VaR vs. Conditional VaR?
  • Challenges of VaR: Incorporating dependence between events into the modelling process

3:00 Afternoon coffee break

4:00 Operational Risk Modelling - Part III: Things about Operational Risk that Excite Academics and What Industry Can Learn from Them

  • KRIs and what determines operational risk
  • The role of corporate governance
  • The role of executive compensation
  • Pillar III of Basel II: Market discipline and disclosure. Do investors actually care about operational risk?
  • Operational risk and credit default swaps (CDS) market

5:00 End of workshop

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