ProbayesOpRisk

The international Basel II Capital Accord was established to promote greater stability in the financial system, it aims at:

1. Ensuring that capital is more risk sensitive,
2. Separating operational risk from credit risk, and quantifying both,
3. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.

In order to comply with this regulation, banks need to:

• Design quantitative systems to evaluate their risks,
• Justify their choices with strong theoretical background.

One problem which is currently faced by these organizations is to assess the operational risk (risk arising from people, information technologies, process failure or external events) from expert believes and historical data.

In collaboration with the Operational Risk Management unit of a major French bank, Probayes has developed ProbayesOpRisk an integrated system allowing to mix different risk evaluation methods. This system uses :

1. Historical losses, to build statistics (Loss Distribution Approach),
2. Experts data, to determine the severity law (how much the risks cost) and the frequency law (how often they happen) according to the classification defined in the Basel II Accord,
3. Scenarios, to build complex causal risk models.

ProbayesOpRisk uses ProBT-Engine to compute and aggregate these various types of probabilistic losses. It uses the ProBT-XL an Excel Interface modelling tool to edit and simulate the previously defined scenarios.