Operational risk modelling refers to a set of techniques that banks and financial firms use to gauge their risk of loss from operational failings. Modelling includes methods for calculating op risk capital requirements. Under Basel II, large banks were permitted to model their own operational risk capital using the advanced measurement approach (AMA). This sophisticated model incorporates four data elements: internal loss data, external data, scenario analysis, and business environment and internal control factors. The updated Basel III framework replaced the AMA with a new standardised measurement approach (SMA), which sets capital largely as a function of a bank’s size and loss history. Some banks use op risk modelling techniques to calculate Pillar 2 capital, which is levied by national supervisors to account for perceived risks not covered under Pillar 1.
OPERATIONAL RISK MODELLING
