Thread by @SAH16928046

How difficult is to move from wholesale banking credit risk modelling (8 yrs of experience) to operational risk?
@GARP_Risk @actuarynews @actuarialpost @TheActuaryMag @jbhearn

Credit risk modelling as per @BIS_org Guidelines (FIRB and AIRB) is different from OR - Operational Risk Modeling because the methodological concepts, logic and applications have contrasting operating characteristics.

Operational risk models generally require a Compound Poisson, Lognormal, Negative Binomial, Binomial, Weibull or any mixture distribution(for e.g. a bi-modal shaped distribution which represents both severity and frequency of internal and external loss data sample sets)

to which data can be fitted, unlike most of the credit or market risk models.
A Compound Distributions (Severity multiplied by Frequency) is used to compute EL, UL, VaR and other risk measures as per the earlier Basel II Pillar I Requirements.

The use of truncated data sets/ sample observations for OR - Operational Risk Modeling was and remains a big problem at most of the banks. Usually, banks did not collect the data “In-House”, that was required by the regulators aka central banks,

to measure and model operational risks, and also the reliance on external loss data (for a given loss event/risk type) consortium is not helpful, due to lack of risk awareness in the industry,

lack of regulatory guidance, improper practices related to exploratory/observational data warehousing, classification and cleaning and high data aggregation & maintenance costs.

Follow the URLs below to study some global developments that took place in the banking and insurance industry to assist the OR Expert/s=>
•ORX Loss Datahttps://managingrisktogether.orx.org/activities/loss-data
boj.or.jp/en/announcemen…
•sbp.org.pk/bsrvd/.../Hans…

All in all most of the banks were not able to advance to the AMA -Advanced Measurement Approach Economic Capital Modeling Level(Pillar I -Basel II Accord), and those which were able to do so, got stuck due to reasons mentioned above,

and in addition to that, the lack of availability of the human capital, that had the prerequisite quantitative and theoretical expertise to build and validate /cross-validated risk models, lack of timely investment in nurturing data repositories

(building the essential data warehousing infrastructure and query relational database - retrieval methods) and lastly, lack of attention to detail to automate the capital adequacy computation modalities, with regard to OR - Operational risk factor/s exposure mapping.

Now the revised approach has removed the AMA - (Advanced Measurement Approach) Methodology, to compute and report Operational Risk-based Capital Requirements in line with the Capital Accord Regulations.

So, it would be a lot simpler for you to move from Wholesale Banking to OR Modeling Desk if you will be working only on ORM Specific Basel II / III Assignments!

But, please note that OR desks/ units at a bank, might also be required to do many other things, and not just focus on Basel Compliance which includes = >

A.Economic capital modelling

B. and stress testing.

Operational Risk is a very vast field, which includes, (but not limited to the following) =>
•#GRC - Governance, Risk and Compliance Architecture Design,
•#ERM -Enterprise risk management taxonomies,

•SOX Compliance and reporting of financial entries,
•Firm-wide Internal Control Design and Testing,
•Internal Audit(they function as part of OR - Operational Risk Management Unit at some banks),
•Business Strategy Analysis,
•Firmwide Risk Financing and Insurance,
•

Credit Risk Underwriting related Operational Risks,
•Document Legal Vetting and Risk Analysis,
•Treasury Deal Processing and Electronic Transfer Payment Authorization Controls executed via the Middle and Back Office,
•Whistleblowing and Employee Ethics Policy Implementation,

•Fraud Risk Management/FCC - Financial Crimes Compliance,
•AML /KYC/ CTF/ CIP Oversight,
•Business Change Management Processes,
•Systemic Risk and Operational Crisis Management,
•Validation of Risk-Adjusted Pricing Models,
•Implementation of the IFRS9

•Additionally =>
If you are working at a Shariah Compliant Financial Company/ bank, there might be many more areas of Operational Risks such as Product Transaction risk management and Shariah Non-Compliance Risk Management,

which is pertinent to the Shariah guidelines and overall Islamic Injunctions, as overseen and approved by the SAC - Shariah Advisory Council / Board in the context of ethical banking operations, policies, standards and procedures

Where will you be working is best known to you!

Good luck.

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