Hi Same question, but different part. The question asks how to parameterise an operational risk model. In the second last line of the solution on page 12, it states that "A proportional method may be justified because operational risk assessment can be subjective". What does it mean by "proportional method"? The line before says "Consider gross and net loss from any mitigating controls". Also, can someone refresh me on desktop analyses, please? I can't remember the definition, and I couldn't google it. Thanks.
Hi Jensen, The examiners are suggesting that we might set the operational risk capital charge as a set proportion of other risk charges. Note however that on the next page they go on to say that this is not generally considered acceptable because it does not demonstrate a thorough assessment of the risk. Have another look at Section 6.3 of Chapter 19, and you'll see that much of this question was drawn directly from the Core Reading. It's a salutary lesson of the importance of learning your bookwork. Indeed the examiners have said that students cannot hope to get through a capital question using just their reserving knowledge alone! Kind regards, Katherine.
