Chapter 10. Operational Risk Management beyond AMA: New Ways to Quantify Non-Recorded Losses

  1. Ron S. Kenett PhD, BSc Chairman CEO Research Professor Professor Associate Director Editor in Chief President3,4 and
  2. Yossi Raanan PhD, BSc Senior Consultant Strategic Partner Senior Lecturer former dean head chairman director5,6
  1. Giorgio Aprile head,
  2. Antonio Pippi PhD telecommunications engineer1 and
  3. Stefano Visinoni electronic engineer Senior Consultant Risk Manager2

Published Online: 19 AUG 2010

DOI: 10.1002/9780470972571.ch10

Operational Risk Management

Operational Risk Management

How to Cite

Aprile, G., Pippi, A. and Visinoni, S. (2010) Operational Risk Management beyond AMA: New Ways to Quantify Non-Recorded Losses, in Operational Risk Management (eds R. S. Kenett and Y. Raanan), John Wiley & Sons, Ltd, Chichester, UK. doi: 10.1002/9780470972571.ch10

Editor Information

  1. 3

    KPA Ltd, Raanana, Israel; University of Turin, Italy

  2. 4

    NYU-Poly, Center for Risk Engineering, New York, USA

  3. 5

    KPA Ltd, Raanana, Israel

  4. 6

    College of Management, Academic Studies, Rishon Lezion, Israel

Author Information

  1. 1

    Department of Information Engineering at the University of Siena, Italy

  2. 2

    Department of Economic Science at the University of Verona, Italy

Publication History

  1. Published Online: 19 AUG 2010
  2. Published Print: 22 OCT 2010

ISBN Information

Print ISBN: 9780470747483

Online ISBN: 9780470972571

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Keywords:

  • Near miss;
  • Opportunity loss;
  • Multiple-effect loss;
  • Basel II;
  • Advanced Measurement Approach

Summary

A better understanding of the impact of IT failures on the overall process of Operational Risk Management can be achieved not only by looking at the risk events with a bottom line effect, but also drilling down to consider the potential risks in terms of missed business opportunities and/or near losses. Indeed, for banking regulatory purposes, only events which are formally accounted for in the books are considered when computing the operational capital at risk. Yet, the “hidden” impact of operational risks is of paramount importance under the implementation of the Pillar 2 requirements of Basel II which expands the scope of the analysis to include reputation and business risk topics. This chapter presents a new methodology in Operational Risk Management that addresses these issues. It helps identify multiple losses, opportunity losses and near misses, and quantifies their potential business impact. The main goals are: 1) to reconstruct multiple-effect losses, which is compliant with Basel II requirements and 2) to quantify their potential impact due to reputation and business risks (opportunity losses) and low level events (near misses), which is indeed a possible extension to Basel II Advanced Measurement Approach (AMA). As a consequence, the proposed methodology has an impact both on daily operations of a bank and at the regulatory level, by returning early warnings on degraded system performance and by enriching the analysis of the risk profile beyond Basel II compliance.