Operational Risk Assessment: The Commercial Imperative of a more Forensic and Transparent Approach

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John Wiley & Sons, Dec 3, 2010 - Business & Economics - 456 pages
Operational risk assessment
The Commercial Imperative of a More Forensic and Transparent Approach

Brendon Young and Rodney Coleman

“Brendon Young and Rodney Coleman's book is extremely timely. There has never been a greater need for the financial industry to reassess the way it looks at risk. [...] They are right to draw attention to the current widespread practices of risk management, which [...] have allowed risk to become underpriced across the entire industry.”

Rt Hon John McFall MP, Chairman,
House of Commons Treasury Committee

Failure of the financial services sector to properly understand risk was clearly demonstrated by the recent 'credit crunch'. In its 2008 Global Stability Report, the IMF sharply criticised banks and other financial institutions for the failure of risk management systems, resulting in excessive risk-taking. Financial sector supervision and regulation was also criticised for lagging behind shifts in business models and rapid innovation.

This book provides investors with a sound understanding of the approaches used to assess the standing of firms and determine their true potential (identifying probable losers and potential longer-term winners). It advocates a 'more forensic' approach towards operational risk management and promotes transparency, which is seen as a facilitator of competition and efficiency as well as being a barrier to fraud, corruption and financial crime.

Risk assessment is an integral part of informed decision making, influencing strategic positioning and direction. It is fundamental to a company’s performance and a key differentiator between competing management teams. Increasing complexity is resulting in the need for more dynamic, responsive approaches to the assessment and management of risk. Not all risks can be quantified; however, it remains incumbent upon management to determine the impact of possible risk-events on financial statements and to indicate the level of variation in projected figures.

To begin, the book looks at traditional methods of risk assessment and shows how these have developed into the approaches currently being used. It then goes on to consider the more advanced forensic techniques being developed, which will undoubtedly increase understanding. The authors identify 'best practice' and address issues such as the importance of corporate governance, culture and ethics. Insurance as a mitigant for operational risk is also considered. Quantitative and qualitative risk assessment methodologies covered include: Loss-data analysis; extreme value theory; causal analysis including Bayesian Belief Networks; control risk self-assessment and key indicators; scenario analysis; and dynamic financial analysis.

Views of industry insiders, from organisations such as Standard & Poors, Fitch, Hermes, USS, UN-PRI, Deutsche Bank, and Alchemy Partners, are presented together with those from experts at the FSA, the International Accounting Standards Board (IASB), and the Financial Reporting Council.

In addition to investors, this book will be of interest to actuaries, rating agencies, regulators and legislators, as well as to the directors and risk managers of financial institutions in both the private and public sectors. Students requiring a comprehensive knowledge of operational risk management will also find the book of considerable value.

 

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Contents

PART I THE ASSESSMENT OF RISK AND ITS STRATEGIC IMPORTANCE
1
PART II QUANTIFICATION
277
Bibliography
419

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About the author (2010)

BRENDON YOUNG is recognized internationally as a leading expert in risk management. He is chairman of the Operational Risk Research Forum and founding president of the Institute of Operational Risk. He has been an advisor to prominent financial institutions including Moody’s and the Financial Reporting Council Board of Actuarial Standards. He has published papers and lectured widely, giving presentations at the FSA, the Bank of England, BaFin, the Dutch National Bank, the OCC, and the New York State Banking Department. Previously, he was director of Arthur Andersen’s risk research centre. In academia he was business school associate dean, responsible for risk research and business development. His early career was in consultancy with Deloitte and later in venture capital. Initially he trained in industry with Rolls-Royce aero-engines and Jaguar Cars, qualifying both as a chartered engineer and a chartered management accountant.

RODNEY COLEMAN, until recently, was a senior lecturer in mathematics at Imperial College London, specialising in statistics and quantitative finance. He has given presentations widely on loss data analysis, in Europe, Canada and the United States and Korea. He has been involved with operational risk research for more than 12 years, and is a founding fellow of the Institute of Operational Risk and an Associate Editor of the Journal of Operational Risk. He was an author of the first published academic paper on applying statistical methods to model loss data for quantifying operational risk. He has been closely associated with the Operational Risk Research Forum since its beginnings, and addressed its meetings at BaFin and the New York State Banking Department. He has given presentations at the Dutch National Bank, the Oprisk Europe Conference, the Institute of Actuaries Actuarial Teaching and Research Conference, the Actuarial Studies in Non-Life Insurance UK meeting, and widely including universities in Canada, Italy and Korea. He is a fellow of the Royal Statistical Society and a member of the International Statistical Institute.

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