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REVIEW: "Operational Risk: Regulation, Analysis, and Management", Carol Alexander

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  • Rob, grandpa of Ryan, Trevor, Devon & Ha
    BKOPRISK.RVW 20030913 Operational Risk: Regulation, Analysis, and Management , Carol Alexander, 2003, 0-273-65966-9, U$59.95/C$89.99 %E Carol Alexander %C
    Message 1 of 1 , Nov 5, 2003
      BKOPRISK.RVW 20030913

      "Operational Risk: Regulation, Analysis, and Management", Carol
      Alexander, 2003, 0-273-65966-9, U$59.95/C$89.99
      %E Carol Alexander
      %C One Lake St., Upper Saddle River, NJ 07458
      %D 2003
      %G 0-273-65966-9
      %I Prentice Hall
      %O U$59.95/C$89.99 +1-201-236-7139 fax: +1-201-236-7131
      %O http://www.amazon.com/exec/obidos/ASIN/0273659669/robsladesinterne
      %O http://www.amazon.ca/exec/obidos/ASIN/0273659669/robsladesin03-20
      %P 336 p.
      %T "Operational Risk: Regulation, Analysis, and Management"

      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

      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

      rslade@... slade@... rslade@...
      Computer Security Day, November 30 http://www.computersecurityday.com/
      victoria.tc.ca/techrev/mnbksc.htm sun.soci.niu.edu/~rslade/secgloss.htm
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