Study Notes: Operational Risk

Chapter 7. Operational Risk Study Notes will cover the following learning objectives:

* Describe the different categories of operational risk and explain how each type of risk can arise.
* Compare the basic indicator approach, the standardized approach, and the advanced measurement approach for calculating operational risk regulatory capital.
* Describe the standardized measurement approach and explain the reasons for its introduction by the Basel committee.
* Explain how a loss distribution is derived from an appropriate loss frequency distribution and loss severity distribution using Monte Carlo simulations.
* Describe the common data issues that can introduce inaccuracies and biases in the estimation of loss frequency and severity distributions.
* Describe how to use scenario analysis in instances when data is scarce.
* Describe how to identify causal relationships and how to use Risk and Control Self-Assessment (RCSA), Key Risk Indicators (KRIs), and education to measure and manage operational risks.
* Describe the allocation of operational risk capital to business units.
* Explain how to use the power law to measure operational risk.
* Explain the risks of moral hazard and adverse selection when using insurance to mitigate operational risks.

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