Ian (ringbark) wrote,
Ian
ringbark

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Risk seminar this evening

Well, what an evening...after a little while here, it was off to the Reuters building to listen to Mark Lawrence. Seems I was mistaken before: he's still based in Melbourne, and just here for a short visit. He went into a lot of detail about some aspects of Operational Risk, but maybe I'll just cut here. He went into a lot of detail about the fact that while it's perfectly possible to have very accurate and robust estimates within Credit Risk, this just cannot be done in Operational Risk: various estimates at ANZ differed by a factor of five. It was a very good presentation: if we consider small/large individual losses with low/high frequencies, the fact is that low frequency/small loss events are not important, while hugh frequency/large loss event s don't matter either: the company with those is already out of business. So low frequency/large loss events are the highest priority, with high frequency/small loss events as a secondary focus. But after we understand our threats, understand our defences and understand the weaknesses in the defences, it's time to prioritise what to fix (which is a management task).
One striking assertion that Mark made is that the market value lost due to operational failures is, on average, twelve times larger than the loss incurred by the event itself. So, for example, a $5m operational loss will tend to wipe $60m off the company's market cap after 120 days.
But over and over, we heard the fact that nobody can really pin down the capital required for Op Risk. Under Basel 1, it's 0%, and that's not right. CP2 said 20%, CP3 had knocked it down to 12% in the face of industry rebellion, yet the major banks that were keeping capital for Op Risk had more than 20%, which suggested that the complaint it was too much was being made by people who hadn't done the sums.
The recommendations were: Develop Operational Risk frameworks and systems in partnership with business units. Ensure Op Risk measurements are linked directly to day-to-day processes of Op Risk Management and that there is robust internal discussion of cost v benefit for the measurement approach which is chosen.
The keys are PRAGMATISM and DIALOGUE. Mark wrapped it up by saying that we should always remember that the main goal is effective risk management - not regulatory compliance!
Both before and after the presentation, I got to talk to some people and get some "networking". It was also good to have a few words with the speaker afterwards: we had been in the same organisation and had a few colleagues in common. And he kept on talking about the cricket. But I reckon it's pretty much time to turn in now.
Tags: prmia
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