Quantification of Operational Risk under Basel II: The Good, Bad and Ugly (Finance and Capital Markets Series)

The book presents arguments that are critical of the Basel II Accord, particularly the advanced measurement approach to operational risk. It is argued that the advanced measurement approach is not viable in terms of costs and benefits and is likely to distract financial institutions from the real task of managing operational risk. This book presents arguments that are critical of the Basel II Accord, particularly the advanced measurement approach to operational risk. It identifies the 'good', 'bad' and 'ugly' with respect to practices pertaining to the implementation of the operational risk provisions of Basel II. In particular, it is argued that the advanced measurement approach is not viable in terms of costs and benefits and that it is likely to distract financial institutions from the real task of managing operational risk. Some strong arguments are presented against the purely quantitative approach to operational risk management. The author demonstrates how the estimated capital charge produced by using the loss distribution approach suggested by Basel II is so sensitive to the underlying assumptions that banks can manipulate their internal models in such a way as to produce the lowest possible capital charge. Given that the advanced measurement approach will be used by large internationally active banks only, the Basel II Accord will actually boost competitive inequality when it purports to create a level playing field This book presents an exposition and a critique of the Basel II Accord, particularly the advanced measurement approach to operational risk.It is expository and critical at the same time. It is accessible to the non-specialist. It is practical and up-to-date. It presents simple illustration of some complex ideas, such as the effect of correlation on the estimated capital charge. It deals with practical topics such as the subprime crisis and the Societe Generale fiasco.The book presents arguments that are critical of the Basel II Accord, particularly the advanced measurement approach to operational risk. It is argued that the advanced measurement approach is not viable in terms of costs and benefits and is likely to distract financial institutions from the real task of managing operational risk Front Matter....Pages i-xix Preliminary Concepts and Issues....Pages 1-38 From Basel I to Basel II: A Great Leap Forward?....Pages 39-82 Operational Risk: Definition, Features and Classification....Pages 83-136 The Advanced Measurement Approach to Operational Risk....Pages 137-169 Theoretical and Empirical Studies of Operational Risk....Pages 170-195 Monte Carlo Simulation: Description and Examples....Pages 196-228 Operational Risk: Where Do we Stand?....Pages 229-250 Back Matter....Pages 251-268