SAS: Operational risk: Where is the value? A first order approximation
Posted: 14 April 2008 | Source: SAS
This article focuses on finding the true tangible value of investing in upgrades (such as technology improvements) to the operational risk control framework. Our method calculates an upper and lower bound for the cost of capital incurred from taking on operational risk. This method provides practitioners a first order approximation to quantify the benefits of enhancing the operational risk control framework.
Using Return on Risk Weighted Assets (RORWA) time series and a public loss database, we were able to devise a top-down, data-driven approach to quantify the benefits of enhancing the operational risk framework. The potential savings matrix (as shown below) is a first order approximation for the business case of investing in operational risk technology. In other words, it provides a view of the benefits gained by enhancing the control environment as a linear function of a certain percentage savings level.