Operational risk modelling should be 'simple and transparent'

Operational risk modelling should be kept “simple and transparent” and always incorporate scenario analysis, according Philip Umande, Bank of England technical specialist.

Speaking to senior risk executives from banks and other financial institutions at Aon’s inaugural event on operational risk last week, Umande said it was important to use operational risk models for more than just regulatory capital purposes.

He said that while operational risk-modelling expectations were similar for Solvency II and ICAS, all models should be easily understandable, both for internal and external stakeholders.

Risk-modelling tools

Experts from the Bank of England, Santander, Aon and the Institute of Operational Risk outlined the importance of designing and building risk-modelling tools.

The event discussed the next generation of operational risk modelling. It assessed the need to meet existing regulatory requirements while effectively mitigating losses, and identified the need for scenario analysis as a critical component of modelling.

Aon head of financial institutions Jonathan Humphries said: “In today’s challenging regulatory environment, it is essential that financial institutions understand the need to review and develop their internal models.

“Operational risk now forms a critical part of mitigating financial loss, and it is essential that models not only meet regulatory requirements but also have the ability to deliver real value to business. The meeting was aimed at exploring this.”

Easing losses

He added: “We are seeing more and more financial institutions that wish to mitigate losses as a direct result of the financial crisis of 2008. 

“At Aon we have helped more than 20 advanced measurement approach banks and other financial institutions solve issues such as lack of data and establishing stability. 

“We aim to hold a series of these events, to ensure financial institutions have all the tools at their disposal to mitigate risk.”