Operational Risk Toward Basel III

This book consists of chapters by contributors (well-known professors, practitioners, and consultants from large and well respected money management firms within this area) offering the latest research in the OpRisk area. The chapters highlight how operational risk helps firms survive and prosper by givingreaders the latest, cutting-edge techniques in OpRisk management. Topics discussed include: Basel Accord II, getting ready for the New Basel III, Extreme Value Theory, the new capital requirements and regulations in the banking sector in relation to financial reporting (including developing concepts such as OpRisk Insurance which wasn't a part of the Basel II framework). The book further discussed quantitative and qualitative aspects of OpRisk, as well as fraud and applications to the fund industry.

Foreword ix

About the Editor xi

Acknowledgments xiii

About the Contributors xv

Part One Operational Risk Measurement: Qualitative Approaches

Chapter 1 Modeling Operational Risk Based on Multiple Experts’ Opinions 3
Jean-Philippe Peters and Georges Hübner

Chapter 2 Consistent Quantitative Operational Risk Measurement 23
Andreas A. Jobst

Chapter 3 Operational Risk Based on Complementary Loss Evaluations 69
Andrea Giacomelli and Loriana Pelizzon

Chapter 4 Can Operational Risk Models Deal with Unprecedented Large Banking Losses? 85
Duc Pham-Hi

Chapter 5 Identifying and Mitigating Perceived Risks in the Bank Service Chain: A New Formalization Effort to Address the Intangible and Heterogeneous Natures of Knowledge-Based Services 97
Magali Dubosson and Emmanuel Fragnière

Chapter 6 Operational Risk and Stock Market Returns: Evidence from Turkey 115
M. Nihat Solakoĝlu and K. Ahmet Köse

Part Two Operational Risk Measurement: Quantitative Approaches

Chapter 7 Integrating Op Risk into Total VaR 131
Niklas Wagner and Thomas Wenger

Chapter 8 Importance Sampling Techniques for Large Quantile Estimation in the Advanced Measurement Approach 155
Marco Bee and Giuseppe Espa

Chapter 9 One-Sided Cross-Validation for Density Estimation with an Application to Operational Risk 177
María Dolores Martínez Miranda, Jens Perch Nielsen, and Stefan A. Sperlich

Chapter 10 Multivariate Models for Operational Risk: A Copula Approach Using Extreme Value Theory and Poisson Shock Models 197
Omar Rachedi and Dean Fantazzini

Chapter 11 First-Order Approximations to Operational Risk: Dependence and Consequences 219
Klaus Böcker and Claudia Klüppelberg

Part Three Operational Risk Management and Mitigation

Chapter 12 Integrating “Management" into “OpRisk Management" 249
Wilhelm K. Kross

Chapter 13 Operational Risk Management: An Emergent Industry 271
Kimberly D. Krawiec

Chapter 14 OpRisk Insurance as a Net Value Generator 289
Wilhelm K. Kross and Werner Gleissner

Chapter 15 Operational Risk Versus Capital Requirements under New Italian Banking Capital Regulation: Are Small Banks Penalized? 311
Simona Cosma, Giampaolo Gabbi, and Gianfausto Salvadori

Chapter 16 Simple Measures for Operational Risk Reduction? An Assessment of Implications and Drawbacks 337
Silke N. Brandts and Nicole Branger

Part Four Issues in Operational Risk Regulation and the Fund Industry

Chapter 17 Toward an Economic and Regulatory Benchmarking Indicator for Banking Systems 361
John L. Simpson, John Evans, and Jennifer Westaway

Chapter 18 Operational Risk Disclosure in Financial Services Firms 381
Guy Ford, Maike Sundmacher, Nigel Finch, and Tyrone M. Carlin

Chapter 19 Operational Risks in Payment and Securities Settlement Systems: A Challenge for Operators and Regulators 397
Daniela Russo and Pietro Stecconi

Chapter 20 Actual and Potential Use of Unregulated Financial Institutions for Transnational Crime 413
Carolyn Vernita Currie

Chapter 21 Case Studies in Hedge Fund Operational Risks: From Amaranth to Wood River 435
Keith H. Black

Chapter 22 A Risk of Ruin Approach for Evaluating Commodity Trading Advisors 453
Greg N. Gregoriou and Fabrice Douglas Rouah

Chapter 23 Identifying and Mitigating Valuation Risk in Hedge Fund Investments 465
Meredith A. Jones

Index 479

GREG N. GREGORIOU, PhD, is Professor of Finance in the School of Business and Economics at the State University of New York at Plattsburgh. He has written over fifty articles on hedge funds and managed futures in various peer-reviewed publications. In addition to a multitude of publications with a variety of publishers, Gregoriou is author of the following Wiley books: Stock Market Liquidity; International Corporate Governance After Sarbanes-Oxley; Commodity Trading Advisors; Hedge Funds: Insights in Performance Measurement, Risk Analysis, and Portfolio Allocation; and Evaluating Hedge Fund and CTA Performance. Recent developments in the financial world have once again brought the issue of risk management to the forefront. Without a doubt, international banking reforms are now more important than ever, and understanding current compliance issues as well as the effects of future accords such as Basel III is essential.

While newly developed and optimized financial products are supposed to provide better protection against credit and market risk, the factors involved in the operational risk arena continue to grow in complexity. That's why editor and financial expert Greg N. Gregoriou has created Operational Risk toward Basel III. In it, he brings together experienced practitioners, consultants, and academics to analyze key concepts associated with this discipline.

Divided into four comprehensive sections—Operational Risk Measurement: Qualitative Approaches; Operational Risk Measurement: Quantitative Approaches; Operational Risk Management and Mitigation; and Issues in Operational Risk Regulation and the Fund Industry—this detailed guide not only contains contributed chapters that provide an abundant amount of information regarding operational risk, but it also walks you through a wide array of case studies and examples that will solidify your understanding of the issues discussed.

Topics covered, include:

• Operation risk (OpR) management under the new Basel Capital Accord

• Dealing with the intangible nature of banking services

• OpR vs. capital requirements under new banking capital regulations

• Integrating OpR into total Value-at-Risk (VaR)

• OpR disclosure in financial services firms

• Hedge fund operational risks

• OpR in securities clearing and settlement systems

While operational risk has long been regarded as a mere part of "other" risks—outside the realm of credit and market risk—it has quickly made its way to the forefront of finance. With the implementation of the Basel II Accord throughout the developed world and Basel III on the horizon, many financial professionals, as well as those preparing to enter this field, must be familiar with a variety of issues related to operational risk modeling, management, and regulation. Operational Risk toward Basel III contains the information you need to achieve this goal.

Recent developments in the financial world have once again brought the issue of risk management to the forefront. Without a doubt, international banking reforms are now more important than ever, and understanding current compliance issues as well as the effects of future accords such as Basel III is essential.

While newly developed and optimized financial products are supposed to provide better protection against credit and market risk, the factors involved in the operational risk arena continue to grow in complexity. That's why editor and financial expert Greg N. Gregoriou has created Operational Risk toward Basel III. In it, he brings together experienced practitioners, consultants, and academics to analyze key concepts associated with this discipline.

Divided into four comprehensive sections—Operational Risk Measurement: Qualitative Approaches; Operational Risk Measurement: Quantitative Approaches; Operational Risk Management and Mitigation; and Issues in Operational Risk Regulation and the Fund Industry—this detailed guide not only contains contributed chapters that provide an abundant amount of information regarding operational risk, but it also walks you through a wide array of case studies and examples that will solidify your understanding of the issues discussed.

Topics covered, include:

• Operation risk (OpR) management under the new Basel Capital Accord
• Dealing with the intangible nature of banking services
• OpR vs. capital requirements under new banking capital regulations
• Integrating OpR into total Value-at-Risk (VaR)
• OpR disclosure in financial services firms
• Hedge fund operational risks
• OpR in securities clearing and settlement systems

While operational risk has long been regarded as a mere part of "other" risks—outside the realm of credit and market risk—it has quickly made its way to the forefront of finance. With the implementation of the Basel II Accord throughout the developed world and Basel III on the horizon, many financial professionals, as well as those preparing to enter this field, must be familiar with a variety of issues related to operational risk modeling, management, and regulation. Operational Risk toward Basel III contains the information you need to achieve this goal.