Operational risk management: Implementing a Bayesian Network for foreign exchange and money market settlement

Type :

Theses

Pages :

114 pages

Format :

.doc

Published date :

03/23/2009

Category :

Economics & finance

Sub category :

Finance

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Summary :

Introduction
1. Motivation and Problem Description
2. Objectives of the research
3. Outline of the thesis
Operational risk, foreign exchange and money market
1. Basel II, operational risk
2. Review of operational risk methods
3. Models for quantification and capital allocation
4. Loss distribution approach
5. The scorecard or risk drivers and controls approach
6. Assessment of Bayesian Networks for operational risk management
Overview of Bayesian Networks
1. Areas of application
2. Theory of Bayesian Networks
3. Strengths and limitations of Bayesian Networks
4. Concluding remarks
Introduction of a case study
1. Special objectives in the case study
Construction of a Bayesian Network for foreign exchange settlement
Results, validation and applications
Summary of the report
Graphs and interpretation
Bibliography
Conclusion

Abstract

Recent Financial scandals in the banking industry have caused considerable attention to be focused on operational risk. This is because an analysis of some of these scandals reveals that the underlying causes of these huge Financial losses are due to operational risk (OR) and not to credit or market risk, as might initially appeared to be the case. The foreign exchange (FX) market has had its fair share of these recent scandals. Two most recent examples of operational risk losses in the FX markets are the National Australia Bank's 227 million USD loss in 2004 and Allied Irish Bank's 750 million USD loss in 2002. These losses have had serious negative impact on the firms' profitability and reputation. Besides scandalous losses in the FX market, trade processing and settlement errors, as well as incorrect settlement, if not controlled, may lead to indirect costs such as compensation payments to counter parties, or to the development of large losses in a firm's portfolio due to managing the wrong position. operational risk losses in the financial industry usually occur at the business unit level and are due to weak management oversight, weak internal controls or the lack of it, or to breakdown of procedures among others. operational risk therefore has to be managed at the business unit level.