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Causal Capital ~ The Knowledge Capital Specialists

Scrapping Op Risk Modelling

Overall I am a fan of Risk.Net and I find their articles, as well as their publications not only interesting but relatively comprehensive, definitely leading when it comes to news in the risk management domain. I like it.


After seeing the article titled “Basel Committee Faces hard choices in op risk modelling reform” a while back, it didn’t really surprise me. This does reflect where operational risk practices have kind of ended up after all these years of struggle. All this aside, “Basel Committee to consult on scrapping op risk modelling” moves us to an irreverent place, especially for a regulator to even consider when such actions are at the extreme counterintuitive end of the spectrum.


The Risk.Net Article | Link

We are now on the precipice of demise, not some KISS-Keep it Simple Silly backwardation of evolution and this regulatory threat, if it comes to pass, will not transmogrify positively in the long run.


There is unlearning going on here not learning. If risk analysts want to rejoice, feel a moment of relief perhaps and believe they are off the hook on having to do any Basel modelling work, they need to accept that they are part of the systemic problem. This relief will eventually come at the opportunity cost of model freedom and risk regulation is likely to end up being relegated to a place no greater than compliance.


As a risk practitioner that often works in this space I have to say that one feels that not only have the regulators failed in some respects and many have, but there is something really lacking overall in a typical bank’s risk systems, culture, authority, capability and knowledge. From what I often observe in banks and I work with a lot these institutions, these failings are in part only academic. In many cases they are an outcome of operational risk frameworks lacking a ‘cohesive realistic perspective’ driven from a vision around risk management that is politically enshrined in a status quo that is immobile.


This failure spawns on many questions starting with have operational risk managers let their industry sector down? Perhaps the regulation was too hard or too academic a task from the outset? Maybe it turns out that operational risk modelling isn’t feasible or useful for banks after all?


Nonetheless, risk framework development in banks in respects to operational risk can’t end in this manner without violating its prime directive. If the regulators cast more than a decade of toil onto the trash heap and label that failed experience, they ignore the banks that have managed to kick some progressive goals. They insult those that do perform to restitute the integrity of those that don’t ~ Shame on them.


Mind you, it is worth noting that the number of banks that succeeded walking the entire path required to establish an integrated Basel II operational risk framework are the minority overall. All this aside, you don't throw this wonderful work away without cherry picking through what can and can't be achieved with risk measurement. Regulators should be offering more assistance or guidance, even know how support if they have it, rather than rulebooks that take years to develop and moments to eradicate. There has been a lot of great work accomplished by some members of the operational risk banking community, this needs to be captured and built upon. Disbanding success because the average bank is unable to move outside the ordinary space of a ridiculous risk control assessment program is busted logic from the ground up.


Anyway, let's see where this goes but at this point in time, the regulatory signal is not positive.


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