Developing and Implementing Scenario Analysis Models to Measure Operational Risk at Intesa Sanpaolo

http://www.mathworks.com/company/newsletters/news_notes/2008/intesa.html

First submitted by Linda Webb on 2 Jul 2009

Scenario analysis models enable bank to hold capital against losses arising from operational risk

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Date	Contributor	Description	Rating
2 Jul 2009	Linda Webb	In 1995, Barings Bank went bankrupt following a $1.4 billion loss due to unauthorized trading activity. Ten years later, JP Morgan agreed to pay a $2.2 billion settlement after the Enron scandal. More recently, Société Générale suffered a €4.9 billion loss following multiple breaches of control in its trading activities. Events like these highlight the enormous economic impact of operational risk—defined in the new Basel Accord (Basel II) as “the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.” Basel II requires financial institutions to hold capital against unexpected losses arising from operational risk. At Intesa Sanpaolo, we used MATLAB to build entirely new scenario analysis models that enable compliance with Basel II requirements. Scenario analysis is a key component of the advanced measurement approach (AMA) to estimating the capital charge for operational risk. Introduced in Basel II, AMA imposes strict quantitative requirements for measuring operational risk. For example, it requires the calculation of a capital measure to the 99.9% confidence level over a one-year holding period. By Andrea Colombo, KPMG Advisory, and Stefano Desando, Intesa Sanpaolo This article was published in The MathWorks News & Notes, 2008

2 Jul 2009

Linda Webb

In 1995, Barings Bank went bankrupt following a $1.4 billion loss due to unauthorized trading activity. Ten years later, JP Morgan agreed to pay a $2.2 billion settlement after the Enron scandal. More recently, Société Générale suffered a €4.9 billion loss following multiple breaches of control in its trading activities.
Events like these highlight the enormous economic impact of operational risk—defined in the new Basel Accord (Basel II) as “the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.” Basel II requires financial institutions to hold capital against unexpected losses arising from operational risk.
At Intesa Sanpaolo, we used MATLAB to build entirely new scenario analysis models that enable compliance with Basel II requirements. Scenario analysis is a key component of the advanced measurement approach (AMA) to estimating the capital charge for operational risk. Introduced in Basel II, AMA imposes strict quantitative requirements for measuring operational risk. For example, it requires the calculation of a capital measure to the 99.9% confidence level over a one-year holding period.

By Andrea Colombo, KPMG Advisory, and Stefano Desando, Intesa Sanpaolo

This article was published in The MathWorks News & Notes, 2008

Tag Activity

Tag	Applied By	Date/Time
whitepaper	Linda Webb	2 Jul 2009 at 10:21am
statistics toolbox	Linda Webb	2 Jul 2009 at 10:21am
statistics	Linda Webb	2 Jul 2009 at 10:21am
scenario analysis modelling	Linda Webb	2 Jul 2009 at 10:21am
paper	Linda Webb	2 Jul 2009 at 10:21am
optimization	Linda Webb	2 Jul 2009 at 10:21am
operational risk measure	Linda Webb	2 Jul 2009 at 10:21am
matlab	Linda Webb	2 Jul 2009 at 10:21am
intesa sanpaolo	Linda Webb	2 Jul 2009 at 10:21am
financial analysis	Linda Webb	2 Jul 2009 at 10:21am
article	Linda Webb	2 Jul 2009 at 10:21am

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