By Mark Russell, OpRisk Expert, PRA supervisory/BoE Policy, (Interim Consultant), Pragmatic Assignments.
This missed the point. In fact, the Basel changes are likely to give OpRisk management a new lease of life.
But this won’t happen unless the industry, legislators, and the regulators, work together to take the new Basel mandate to its logical conclusion.
I understand the shock and horror. The SMA is flawed… it is not risk-sensitive. But no-one has a credible alternative.
I have worked on this on and off for 13 years. I have tackled it, first-hand, from inside the industry and from inside both the PRA and the Bank of England, engaging directly in the last round of Basel negotiation. I am 100% certain that it is not just very difficult, but impossible, to devise a risk-sensitive method for calculating a bank’s OpRisk capital requirement. And I guess nobody really thought that OpRisk capital modelling could work. As a statistical methodology it was no more than emperor’s new clothes.