Managing Operational Risk

This chapter focuses on managing operational risk using the Advanced Measurement approach. In the preceding chapter we devised a quantitative method for calculating the risk capital for operational risks based on historical data. At first sight this may have seemed irrelevant as the past is just that-past. But many regulators and managers feel it necessary to relate management to actual quantification, and the past lends itself most obviously to quantification. Ideally, we could transform the actualised past information into a closed-loop feedback system. However, as that is generally impossible, the next best option is to revitalize quantification, making it more agile and sensitive to input besides historical data. This can be achieved by quantifying the “management system” itself and relating it to the quantification of the risk capital. This divorce of quantification from the passage of time is very desirable from a motivational perspective, as unit managers implementing measures for reducing operational risk need not wait for a certain period to elapse before a pattern manifests itself.