Implementing an AMA for Operational Risk

35 Pages·2005·0.37 MB·English

Implementing an AMA for Operational Risk
Perspectives on the ‘Use Test’
Joseph A. Sabatini
May 20, 2005
Agenda
(cid:216) Overview of JPMC’s AMA Framework
(cid:216) Description of JPMC’s Capital Model
(cid:216) Applying Use Test Criteria for Banks and Regulators
(cid:216) Closing Comments
Appendix: JPMC Capital Model Detail
1
The objective of the op risk framework at JPMC
is improving financial performance
The JPMC Operational Risk framework combines quantitative and
qualitative elements for effective risk management
The framework is:
Risk Event (cid:216) Business-oriented
Self
Error
Assessment (cid:216) Risk-specific
Reporting
(cid:216) Firm-wide
(cid:216) Driven by value proposition
Operational risk system:
Operational Risk (cid:216) Owned by businesses
Governance
Business Capital
Framework
Units Allocation (cid:216) Consistent, firm-wide roll out
(cid:216) Validated by Audit
(cid:216) Compatible with Credit /
Market risk tools
Implementation:
Integrated Key Risk
(cid:216) Project teams for each
Reporting / Indicators
initiative
Best Practices (in design)
(cid:216) Audit sign off required for
key elements
(cid:216) Redundancies eliminated
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Agenda
(cid:216) Overview of JPMC’s AMA Framework
(cid:216) Description of JPMC’s Capital Model
(cid:216) Applying Use Test Criteria for Banks and Regulators
(cid:216) Closing Comments
Appendix: JPMC Capital Model Detail
3
Basel II - The Advanced Measurement Approach
(cid:216) “Under the AMA framework, a banking organization meeting the AMA
supervisory standards would use its internal operational risk
measurement system to calculate its regulatory requirement for
operational risk.”
(cid:216) “While the supervisory standards are rigorous, institutions have
substantial flexibility in terms of how they satisfy the standards in
practice. This flexibility is intended to encourage an institution to
adopt a system that is unique to its risk profile, foster improved risk
management, and allow for future innovation.”
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Basel II - The Advanced Measurement
Approach (cont’d)
(cid:216) “The (AMA-qualified) institution would have to use a combination of ….
- Internal loss event data
- Relevant external loss event data
- Business environment and internal control factors
- Scenario analysis
.… in calculating its operational risk exposure.”
(cid:216) An institution’s analytical framework would have to combine these
elements in the manner that most effectively enables it to quantify its
operational risk exposure ....
.... appropriate to its business model and risk profile.
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Economic capital model for op risk at JPMC
Calculation of capital is a four step process:
PRINCIPLES UNDERLYING THE MODEL:
(cid:216) Risk-based calculation, based on
1 2 3 4
operational data
AAllloloccaatete
CCaallccuullaattee AAddjjuusstt ffoorr AAddjjuusstt f foorr
toto B Buussinineessss
(cid:216) Directionally correct, progressive and BBaassee CCaappiittaall CCoonnttrrool l QQuuaaliltityy RRiisskk
UUnniittss
(Enterprise Level) CChhaannggeess TTrraannssffeerr
repeatable ((LLOOBB))
(cid:216) Incentives for good risk management INPUTS: Simple algorithm Inputs from other Placeholder for
based on components of future
behavior (cid:216)Loss data from
scenario models the framework implementation
the Corporate
(cid:216) Consistent with credit, market and Risk Event
Database
business risk capital
(cid:216)Scenario forecast
(cid:216) Consistent with the Advanced of future losses
Measurement Approach under Basel II
CCoonnttrrooll SSeell-ff
Action Plan KKeeyy RRiisskk
AAsssseessssmmeenntt Audit Grade
Execution IInnddiiccaattoorrss
SSccoorree
BUSINESSES CAN INFLUENCE CAPITAL BY:
(cid:216) Reducing Losses
(cid:216) Improving the quality of controls MMeettrriicc:: Change in SA score MMeettrriicc:: Actual vs. Plan dates
IImmppaacctt:: Reduction or Increase IImmppaacctt:: Increase only
(cid:216) Transferring financial risk
MMeettrriicc:: Change in Audit grade MMeettrriicc:: Change in KRI scores
IImmppaacctt:: Reduction or Increase IImmppaacctt:: Reduction or Increase
2005 JPMorgan Chase & Co. All rights reserved. 6
Agenda
(cid:216) Overview of JPMC’s AMA Framework
(cid:216) Description of JPMC’s Capital Model
(cid:216) Applying Use Test Criteria for Banks and Regulators
(cid:216) Closing Comments
Appendix: JPMC Capital Model Detail
7
Applying Use Test criteria for banks and regulators
Banks Regulators
Conclusion Conclusion
Test 2 Test 2
Danger Signs Danger Signs
Test 3 Test 3
Key Elements Key Elements
Test 4 Test 4
Principles Principles
(cid:216) Data integrity: complete, timely and (cid:216) Rigorous standards maintained
accurate (cid:216) Flexible (non-prescriptive)
(cid:216) Efficacy of calibration approach
(cid:216) Appropriate governance at all (cid:216) Consistent application across
organization levels banks and national jurisdictions
(cid:216) Transparency and escalation of key (cid:216) Accommodate innovation
issues and information
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Use Test Criteria: Principles
Both banks and regulators should be guided by key principles
Banks Regulators
(cid:216) Data integrity: complete, (cid:216) Rigorous standards maintained
timely and accurate
(cid:216) Flexible (non-prescriptive)
(cid:216) Efficacy of calibration approach
(cid:216) Appropriate governance at all (cid:216) Consistent application across
organization levels banks and jurisdictions
(cid:216) Transparency and escalation (cid:216) Accommodate innovation
of key issues and information
(cid:216) Mandate ongoing improvement
(cid:216) Clear accountability in
remediation
(cid:216) Integrated into business and
risk management
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