loss data and how to process losses into different types of trade activities

Loss data and how to process losses into different

This preview shows page 18 - 20 out of 36 pages.

loss data and how to process losses into different types of trade activities and different types of events, which is a necessity when a bank applies the Advanced Measurement Approach. 5.1 Operational loss data Many industry participants are aiming for a meaningful risk measurement approach, by collecting operational loss data. The operational loss data will be registered in a database; this will be referred as the Loss Database . The fundamental premise of collecting operational loss data is that each firm’s operational loss is a reflection of its expected operational risk exposure. However, the challenge of measuring operational loss is the calculation of the unexpected loss. Unexpected operational losses are losses that have occurred, but they are not registered in the database. In fact, they are for the most part unknown. There are certain key questions to be asked, when dealing with the collection of operational loss data. 1). How do you know which data to collect? 2). How to register the loss events? Before these questions are answered first one will read about the importance of the Loss Database for the LDA approach. 18
Image of page 18

Subscribe to view the full document.

5.1.1 What is loss data? Operational loss databases are essentially a collection of stories. These stories can constitute the high-frequency/low-severity events. Events with high-frequency/low-severity are for example: processing errors in a high-volume business. These types of operational losses are expected, as they are easier to be detected. Calculating capital for these expected events will be as easy as examining the historical data. Bank can even budget them as an expected cost of doing business. It is only the larger than expected losses that create downside volatility in a bank’s earnings and they are the high-severity incidents of major fraud and error that make newspaper headlines and which are archived in the media’s databases. Even when the high-severity events are detected, it is hard to tell the size of the financial damage that has been caused. Most of the time, the actual losses will be known weeks or months after the first moment of observation. These rare events that threaten the solvency of institution will be referred as unexpected losses. But, how do you measure an operational risk event that has not been detected yet? These types of events must also be taken into account, when calculating the capital. More of this subject will be described later in this chapter. The most important part of a loss database is without doubt the integrity of data. Whether a bank builds its own database or buys a commercial variety, it is important that the processes and systems must assure good quality. Because working with bad data can result in false stories, which is more dangerous than receiving no data at all. However, collecting operational loss data is a difficult task and it can only be achieved with good data collection processes. The risk profile of the risks is unique in every financial institution and with its own environment. So, one must also
Image of page 19
Image of page 20
  • Winter '14

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes