Process-Event Approach for Operational Risk Estimation

Abstract

<jats:p>Authors propose a new process-event approach for quantitative estimation of operational risk in a bank and calculation the amount of economic capital in dynamics. The proposed approach, according to the Basel II Capital Accord, belongs to the category of “advanced methods”. Operational risk is not financial risk and appeared in unfavorable events mainly. A number of business processes are performed in banking activity. Every business process contains a set of routines (operations), which can be interrupted by operational risk events with certain losses. The main idea of the approach is to describe processes as chains of casual events instead of a traditional graphic description as diagrams. Authors introduce new concepts: an elementary process event, a chain of process events, a time diagram of enterprise’s event flow, and build logical and probabilistic risk models. Methods and formulas for calculation the current and integrated operational risk in dynamics, the amount of economic capital, upper and lower limits of reservation, are given. The value of integrated operational risk can be used as a rating of the current reliability of the bank. The paper outlines the advantages and disadvantages of proposed process-event approach. Research results can be implemented as analytical tool in risk management technology, “process mining” technology and in bank intelligent management systems. </jats:p>

Operational Risk And Identification Of Critical Sets In Process-Event Approach

“…The prediction can be performed visually with use of the event flow diagram for the enterprise (Karaseva's diagram) or the Gantt chart (Clark & Gantt, 1923). The relationship between the Gantt chart and the Karaseva's diagram is discussed in (Karaseva & Karasev, 2019).…”

“…At different consecutive times t 1 , t 2 , .., t k the set E will be consist of different events and their number will also be different, that is, the cardinality of the set E changes with time: Ε 1 , Ε 2 , …, Ε к . This can be clearly demonstrated at the time diagrams of the enterprise's event flow, examples of such diagrams are given in (Karaseva, 2018;Karaseva & Karasev, 2019).…”

“…This paper describes further development process-event approach described in (Karaseva, 2018;Karaseva & Karasev, 2018;Karasev & Karaseva, 2019). Process-event approach was developed by author for dynamic operational risk assessment and economic capital reservation at enterprise operating in the real sector of economy.…”

“…Process-event approach was developed by author for dynamic operational risk assessment and economic capital reservation at enterprise operating in the real sector of economy. The ontology and main definitions of process-event approach were stated in (Karaseva, 2018;Karasev & Karaseva, 2019). The process-event approach is intended to replace the existing method for identifying operational risk factors based on simulation modeling of business processes, presented in the form of flowcharts and diagrams in a certain notation.…”