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Validation of advanced measurement approaches theory – Operational Risk Model

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  • Risk Management

A major U.S. Bank in the mid-west contracted with Prescio to validate their Advanced Measurement Approaches Theory based on the Operational Risk Model.

This SAS based application was developed internally by the statistical and quantitative modelers of the Bank. Our team included business domain experts, statisticians, mathematicians, SAS experts and project managers. Discussions between the Prescio team and the executives of the risk management and the quantitative groups of the Bank were held. From these discussions, it was decided that a validation project would examine different facets of the model according to standard validation practices of the industry.

Prescio performed a multiple step validation process which included, analysis of the theoretical fundamentals of the model, analysis of the business fundamentals, analysis of the internal data, analysis of the Structured Scenario data, determination of the distributions applicable to individual loss events, the combining of internal and structured scenario data, addressing issues related to the Extreme Value theory, and validating their SAS code. Prescio was able to deliver the clients’ requirements within a very tight delivery schedule. Prescio’s performance resulted in follow-on work for other Basel related models in commercial and retail credit.