In
1999, the Basel Committee on Banking Supervision (BCBS),
spurred by
recent bank collapses, started working toward an Accord
in regard to
risk management. The eventual Accord, also known as Basel
II, was not
wholly defined, but established three points or "Pillars":
that banks
establish a capital reserve somewhat commensurate with
their total
risk, that risk management plans be subject to a supervisory
review,
and that such plans be disclosed. Operational risk was
defined as" the risk of loss resulting from inadequate
or failed internal
processes, people and systems or from external events." That
sounds
oddly like what anyone else just calls risk, but bankers
are primarily
concerned with what they see as separate issues: credit
risk and
market risk. This book appears to be a reaction, from
the banks, to
the provisions of the Accord.
It
is a commonly held myth that bankers are pompous, self-satisfied,
out of touch with the real world, and fond of the sound
of their own
voices. The contents of this volume will do little to
dispel that
perception. There is always a problem of quality with
works of
collected essays by different authors, but few of these
papers seem to
be direct or useful.
Part
one is about regulation, and specifically the BCBS
proposals.
Chapter one outlines the provisions of the Basel Accord.
Rather than
a framework for considering risk, chapter two offers
random thoughts
on the matter. We finally get the definition of operational
risk, and
some more detail on the BCBS risk measurement approaches,
in chapter
three. Chapter four has more complaints about the Basel
measures.
Chapter five does have some discussion of fraud controls,
but embedded
in verbiage. Chapter six seems intent on proving that
the idea of
reserve capital in risky situations is not insurance.
Part
two is entitled "Analysis." Chapter seven
deals with statistical
models of operational loss, with a lot of mathematics
and little
practicality. The loss distribution approach (LDA), in
chapter two,
is based on historical data and does not seem to consider
that most
severe events, such as the Barings Bank collapse, are
due to
innovation and changed conditions. Simulation is proposed
in chapter
nine, but without regard to validation of the models
used. Chapter
ten presents a very interesting look at economic capital,
a
calculation of the amount of reserve cash that a company
would need to
cover emergencies in a given year. It is seen as a useful,
single
indicator of risk, and validation is appraised, but,
unfortunately,
only in terms of how acceptable or convincing your figure
is going to
be with the board of directors.
Part
three turns to risk management. Chapter eleven presents
a
scorecard process for risk assessment, but betrays a
fundamental
misunderstanding of the concept by trying to get quantitative
data out
of a qualitative mechanism. The operational risk management
framework
given in chapter twelve is reasonable, if limited and
generic, and
chapter thirteen is basically a duplication of that content.
The
material on Bayesian analysis, in chapter fourteen, does
finally admit
that the technique is poor at identifying risks. Chapter
fifteen goes
through some examples of calculating risk, but the content
is still
vague.
The
material contained in this book is narrow, repetitive,
and padded
out with excessive verbiage. Most of the writing is not
particularly
clear. Even given the intent as a response to a particular
set of
directives, the text is vague and uninformative. It adds
almost
nothing to the risk management literature.
copyright Robert M. Slade, 2003 BKOPRISK.RVW 20030913
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