System and method for measuring and managing operational risk

• US 7,778,856 B2
• Filed: 02/05/2009
• Issued: 08/17/2010
• Est. Priority Date: 12/05/2001
• Status: Expired due to Fees

• Current Assignee: International Business Machines Corporation
• Original Assignee: Algorithmics International Corporation
• Inventors: Rosen, Dan, Syer, David, Reynolds, Diane
• Primary Examiner(s): Jeanty; Romain
• Assistant Examiner(s): Singh; Gurkanwaljit
• Application Number:
  US12/365,961
• Publication Number:
  US 20090138309A1
• Time in Patent Office: 558 Days
• Field of Search: None
• US Class Current: 705/7.28
• CPC Class Codes: G06Q 10/06 Resources, workflows, human or project management; Enterprise or organisation planning; Enterprise or organisation modelling
• CPC Class Codes: G06Q 10/0635 Risk analysis of enterprise or organisation activities
• CPC Class Codes: G06Q 40/03 Credit; Loans; Processing thereof
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/08 Insurance

Abstract

According to one aspect of the invention, there is provided a method of modeling operational risk comprising the steps of: defining one or more reporting hierarchies, wherein said reporting hierarchies are composed of operational units; associating operational risk data to one or more of said operational units, wherein said operational risk data includes data associated with a plurality of first loss events; and calibrating a plurality of loss processes and a plurality of loss process attributes using said plurality of first loss events, wherein a plurality of loss processes are generated for use in at least one of risk management, operations management, and financial management.

Claims

1. A computer-implemented system for measuring and managing operational risk, comprising a processor and a memory, wherein the computer-implemented system comprises:

(a) a database stored in the memory, wherein operational risk data is stored therein, wherein said operational risk data comprises loss, and wherein said operational risk data is associated with one or more operational units;

(b) wherein the processor executes instructions to implement a first calibration engine coupled to said database, wherein said calibration engine calibrates loss process distributions, and estimates a plurality of loss process attributes,

wherein said loss process distributions are calibrated by fitting one or more models for said loss process distributions to said loss data to generate calibrated loss process distributions,

wherein each of said one or more models comprises a distribution functional form, and

wherein said calibrated loss process distributions comprise one or more distribution functional forms and parameters therefore;

(c) wherein the processor executes instructions to implement a second reporting hierarchy engine coupled to said database, wherein said reporting hierarchy engine associates each of said calibrated loss process distributions to said one or more operational units;

(d) wherein the processor executes instructions to implement a third simulation engine connected to said calibration engine for performing simulation-based computations, wherein said third simulation engine is configured to simulate said calibrated loss process distributions over a plurality of scenarios to generate a loss distribution for each of said one or more operational units,

wherein said loss distribution generated for each of said one or more operational units comprises estimates of future loss events,

wherein said plurality of scenarios comprises said plurality of loss process attributes; and

(e) wherein the processor executes instructions to implement a fourth risk engine coupled to said second reporting hierarchy engine and said third simulation engine for computing at least one risk measure using said loss distribution generated for one or more operational units, wherein said risk measure is a measure of operational risk.

2. The system as claimed in claim 1, wherein said risk measure is internal operational risk capital.

3. The system as claimed in claim 1, wherein said risk measure is regulatory operational risk capital.

4. The system as claimed in claim 1, further comprising a report generator for representing said risk measures in a report for use in managing operational risk capital.

5. The system as claimed in claim 1, wherein said at least one risk measure comprises one or more risk measures selected from the group consisting of:

an expected loss, an unexpected loss at a confidence level, a value-at-risk at a confidence level, a marginal value-at-risk at a confidence level, a measure of frequency of loss events, a measure of severity of loss events, and one or more arrival times of loss events.

6. The system as claimed in claim 1, wherein said loss process distributions comprise joint frequency distributions that define a codependence between operational units, and wherein the one or more models for said loss process distributions comprise a latent variable model.

7. The system as claimed in claim 1, wherein said operational risk data comprises one or more data items selected from the group consisting of:

a plurality of internal loss events, a plurality of indicators, a plurality of internal near-miss events, a plurality of scenarios, a plurality of external consortium loss events, issues data, and a plurality of external public domain loss events.

8. The system as claimed in claim 1, wherein said calibration engine is further configured to calculate a level of fit of said one or more loss models to said loss data.

9. The system as claimed in claim 1, wherein said one or more models for said loss process distributions comprises a frequency distribution model and a severity distribution model, wherein said frequency distribution model is represented by at least one of a parametric distribution or a non-parametric distribution, and wherein said severity distribution model is represented by at least one of a parametric distribution or a non-parametric distribution.

10. The system as claimed in claim 1, wherein said one or more models for said loss process distributions comprises a complete loss distribution model.

11. The system as claimed in claim 1, wherein said one or more operational units comprises one or more operational units selected from the group consisting of:

business units, geographic locations, reporting lines, industries, regulatory requirements, generic organizational units, instruments and risk classes.

12. The system as claimed in claim 1, wherein at least two loss distributions are generated for one or more operational units, and wherein said computing comprises aggregating said at least two loss distributions generated for one or more operational units to compute said at least one risk measure.

13. A method of measuring and managing operational risk within a firm, wherein a computer processor executes instructions of the method, the method comprising:

defining by the processor a plurality of reporting hierarchies, wherein said reporting hierarchies are composed of operational units;

associating by the processor operational risk data to one or more of said operational units, wherein said operational risk data comprises loss data;

calibrating by the processor loss process distributions and estimating a plurality of loss process attributes,

wherein said calibrating comprises fitting one or more models for said loss process distributions to said loss data to generate calibrated loss process distributions,

wherein each of said one or more models comprises a distribution functional form, and

wherein said calibrated loss process distributions comprise one or more distribution functional forms and parameters therefor;

defining a plurality of scenarios, wherein said plurality of scenarios comprises said plurality of loss process attributes;

simulating said calibrated loss process distributions over a plurality of scenarios to generate a loss distribution for each of said one or more operational units,

wherein said loss distribution generated for each of said one or more operational units comprises estimates of future loss events;

storing loss data associated with said loss distribution generated for one or more operational units in a storage medium; and

producing at least one risk measure using said loss distribution generated for one or more operational units, wherein said risk measure is a measure of operational risk.

14. The method as claimed in claim 13, wherein loss data associated with said distribution generated for one or more operational units is stored in a mark-to-future Cube.

15. The method as claimed in claim 13, wherein said risk measure is internal operational risk capital.

16. The method as claimed in claim 13, wherein said risk measure is regulatory operational risk capital.

17. The method as claimed in claim 13, further comprising generating a report, wherein said report represents said risk measures for use in managing operational risk.

18. The method as claimed in claim 13, wherein at least two loss distributions are generated for one or more operational units, and wherein said producing comprises aggregating said at least two loss distributions generated for one or more operational units to produce said at least one risk measure.