SCENARIO ANALYSIS FOR BASEL II OPERATIONAL RISK MANAGEMENT
1 Introduction: Scenario Analysis for Potential Catastrophic Losses 1
2 Addressing Operational Risk 3
3 Scenario Analysis in a Risk Measurement Framework 5
4 Scenario Analysis in a Risk Management Framework 6
5 Achieving Risk Measurement and Management 6
6 Conclusion: Benefiting from Scenario Analysis 7
1 Introduction: Scenario Analysis for Potential Catastrophic Losses
“Are you saying that you want us to figure out how to lose R50 million?” asked the risk manager for the fund technology and services unit of a large bank. “Obviously, you have no idea how our funds are managed or what extreme measures we take to make sure that no money is lost.”
With a hint of pride in his voice, he added, “You know our monthly losses are only in the thousands of Rand, even though we handle millions of Rand on average. We are able to do this because we have sound procedures for money management, prudent guidelines for investing and highly trained personnel.”
Not easily dissuaded, Susan, the scenario analysis manager, responded by acknowledging the risk manager’s success. However, she urged him to identify a group of key personnel to participate in a scenario analysis exercise. The goal of this exercise would be to identify potential scenarios that could create losses above the R50 million threshold, which had been established for identifying low probability, high-severity losses.
She added that such scenarios were being developed across the financial institu ...