Performing risk calculations makes it possible to have a total portfolio assessment of the operational risks at hand and not just consider individual potential events and incidents.
The Risk calculation module consists of 4 sub-modules. Manage batch calculations, Calculation settings, Run batch calculation ad-hoc, Run ad-hoc calculation.
Before defining and performing calculations, calculation settings must be defined and assigned to calculations. Calculation settings are required to specify input for how the calculations should be performed. These input concern the number of simulations and correlation structures. By defining different levels of correlations, stress testing and sensitivity analysis can be performed.
MANAGE BATCH CALCULATIONS
Although ad-hoc calculations can be performed in SIGMAOpRisk, the idea behind the Risk calculation module is to define a set of calculations that run automatically every night on an end-of-day basis. These calculations are defined in the Manage batch calculation module.
When defining batch calculations, information about the input to the calculation, calculation settings and marginal dimensions as well as risk measures and confidence levels are required.
The two sub-modules Run batch calculation ad-hoc and Run ad-hoc calculation allow for running ad-hoc calculations, either directly run a defined batch calculation or define a new calculation completely.
Below you see the webform of the Run ad-hoc calculation, where the full calculation is defined completely.
The calculation to be run is based on both incidents and potential events. The calculation setting indicates a correlation structure of 10% between basel cause categories (the are set on both incidents and potential events). Results are shown by company business units and the input of the incidents and potential events is how these input looked on 1st of september 2015. The output is specified as csv.
You see that all risk measures are requested across the confidence levels of 95%, 99% and 99.9%.
The risk calculations are based on monte-carlo simulations. Losses are simulated based on the input from potential events and incidents and consider likelihoods and correlations. Loss calculations (across scenarios) take into account impacts including the mitigating effects of controls and insurance schemes.
From the simulated loss distribution, portfolio risk measures such as expected loss, value-at-risk, expected shortfall can be derived. Results are calculated across various reporting dimensions, like legal entities, business unit, Basel loss categories etc, which makes it possible to drill-down key-ratios.
The results include what is required in Advanced Measurement Approach (AMA) for pillar I, i.e. value-at-risk with a 99.9% confidence level and a risk horizon of 1-year.