insights into mc+
A lot of firms have difficulties in calculating & making use of PILLAR II Operational Risk Capital in a way that meets regulatory expectations.
Few organisations rely on advanced measurement approaches (or ‘AMA’) for calculation of regulatory capital requirements for operational risk. But the regulator has recently stated that it expects “even non-AMA banks should have AMA risk models for their Pillar II calculations” – those calculations on which the firm’s own calculation of capital requirements is based.
THE REGULATOR HAS LAID OUT CONDITIONS FOR OPERATIONAL RISK MODELS:
They should incorporate
SIMPLE AND TRANSPARENT models (e.g. frequency and severity distributions) with easy to understand model assumptions that reflect the nature of operational losses – the ‘shape’ of the distribution;
Inputs to the models should be derived from a combination of scenario ANALYSIS (and if available historical loss events) and business ENVIRONMENT and CONTROL factors;
Models should be used (and useful); they should be used for RISK-BASED DECISION-MAKING e.g. for approving new products, in computing risk adjusted return on capital (RAROC) of new projects, for efficiently allocating capital and resources to managing the risk factors, etc.
Using 'traditional' Monte Carlo simulation tools, the regulatory requirements are onerous even for the most sophisticated firm.
MOST EXISTING SOFTWARE IS GENERALLY LIMITED
– BY ITS OWN COMPLEXITY – BOTH IN APPROACH AND FUNCTIONALITY.
USING mc+, FIRMS CAN MEET THE REGULATORY REQUIREMENTS QUICKLY
AND EFFICIENTLY, WITHOUT LOSS OF ANALYTIC ROBUSTNESS.
THE RESULT IS ANALYSIS THAT IS SO QUICK YOU CAN USE IT IN EVERYDAY DECISIONS AND SO FLEXIBLE YOU CAN USE IT ON ANY TYPE OF OPERATING PROBLEM - GIVING RAPID INSIGHT IN TO CAPITAL REQUIREMENTS FOR OPERATIONAL RISK.
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