Exploring risk exposure methodologies
- 24 February 2020
A new industry initiative
ORX has started a new initiative to advance and promote the use of structured, risk-factor driven approaches to operational risk measurement. We've launched this project following interest about risk exposure methodologies from some of our member firms.
In this study, we'll explore the current and potential use of these approaches. As the largest operational risk management association in the financial sector, we'll also see how ORX can support the operational and non-financial risk discipline by collecting and benchmarking relevant risk factors.
The initiative is free for all members of ORX to take part in. If you're not an ORX member but would like to know more about the study, then please contact us.
Evaluating the risk profile
The assumption behind the factor-driven approaches to operational risk measurement is that the underlying exposure of a financial institution to a specific risk can be described and bound by a set of factors. This then drives the frequency and severity of loss events.
These factors typically don't differ much between firms as they relate to the fundamental processes that give rise to operational risk events and drive their frequencies and impacts. However, the specific values or distributions that factors may take and the strength of controls which may mitigate their impact can vary from institution to institution.
Bringing the industry together
Because there is no standard approach, there are huge benefits to be gained from bringing the industry together. We'll try to establish a set of agreed factors, the mechanism by which those factors interact and a benchmark of their values.
What will the initiative achieve?
We have five key goals that we hope this initiative will achieve:
1. Development through collaboration
Through the involvement of a wide working group, participants will be able to learn from their peers – especially in emerging areas, such as climate risk.
2. Create reference models
Provide industry-agreed reference models which can be used and customised by individual firms.
3. Capital purposes
The developed models may well have direct or indirect (e.g. challenger model) application in economic capital, stress testing and capital allocation.
4. Benchmarking and mitigation
The work provides participants with a structured way to benchmark. From this comes an understanding of which drivers matter most and the key controls which can mitigate loss.
5. Drive the industry agenda
This project will help drive the industry agenda on the measurement of operational risk.
How we'll run the initiative
As with many of our studies and initiatives, we'll set up a steering group of operational and non-financial risk professionals from our member firms to help guide the project. The steering group will provide expert input, helping to agree the risk drivers that will be collected and the structure of the models.
Following this, we'll collect, analyse and benchmark data from all the of our member institutions taking part in the study. Finally, we will report the results of our work back to the participants and our wider membership and decide on the future direction of our work in this area.