Operational Risk : A Practitioner's View

We show that for a production unit of a bank with well-defined workflows operational risk can be unambiguously defined and quantitatively modelled. The results of this modelling exercise are relevant for the implementation of a risk management framework: It turns out, that only a small share of all workflows make a significant contribution to the resulting value at risk or expected shortfall. This result is quite robust under stress testing. Since the definition and maintenance of processes is very costly, this last result is of major practical importance. Second, the approach allows us to distinguish features of quality and risk management respectively, using the same modelling approach. Finally, the methodology shows that not all risk factors which were considered in the self-assessment procedure are matter: Two of them are completely irrelevant and the importance of the other factors depends on the management objectives: Whether the concern is on high frequency - low severity events, i.e. quality management, or on low frequency - high severity events, i.e. operational risk management, determines the significance of the risk factors