Validating operational risk models

When applied to your institution’s scenario analysis results and internal loss data, a capital model is produced which is compliant with all requirements of the Basel framework.The Op Risk Lighthouse Model is easy to use, validated by independent validation firms, and satisfies the Basel Committee’s Advanced Measurement Approach requirements for operational risk.Managers have a habit of adding KPIs but never “rightsizing” the list to drive strategic intent.This causes confusion as to what is really important. Ensure that selected KPIs drive toward your strategic intent: KPIs should not just measure performance.Implementation of the AMA has a positive impact on reputation and perception by stakeholders.More sophisticated and advanced risk management sends a clear message of a sound risk management culture to shareholders, clients, rating agencies and the market.MV involves a technical (both from quantitative and qualitative perspectives) investigation of the following stages of the model lifecycle: The nature and the content of the analysis in an MV exercise depends on where (i.e., at which stage) the model lies in its lifecycle.

In particular, these RTS specify the conditions for assessing the materiality of extensions and changes to: the Internal Rating Based approach (IRB approach) for credit risk; the Advanced Measurement Approach (AMA) for operational risk and the Internal Models Approach (IMA) for market risk.

teams: Internal Audit (IA) and Model Validation (MV).

The latter is indeed a newbie, introduced by Basel II, when compared to the former, which has been active in the banks for a long time now.

This should ensure consistency of practices within and across the different approaches while allowing for risk-specific requirements.

, which is defined as a situation in which the loss exceeds both the standard Value-at-Risk (Va R) and a Va R defined at an extremely low probability.

Validating operational risk models