The Business Challenge
The largest private-sector bank in India wanted to use the Advanced Measurement Approach (AMA) of Basel II for its operational risk capital calculation. The bank appointed Aptivaa to design and implement all the necessary components of the capital calculation framework.

Our Approach
We analysed the bank's internal data and observed that the existing internal loss data was not sufficient to use the AMA for the capital calculation. Aptivaa then evaluated other possible statistical modeling approaches, such as the Loss Distribution Approach with the Hybrid Measurement Approach, and concluded that the most effective method would be to supplement the bank's internal data with the Scenario Based Approach; a well accepted methodology within the banking industry.
For this purpose, we conducted a pilot exercise with the bank's retail banking group, which represented the largest part of the bank's business. The first stage of the pilot exercise was for Aptivaa to facilitate focused interviews with the heads of the retail banking group's business lines and support units (HR, IT, Internal Audit, Fraud Investigation, Legal and Compliance) in order to identify risks associated with the bank's processes and procedures. This information formed the basis for generating possible loss scenarios.
The second stage of the exercise was to conduct a workshop involving a selected group of around twenty participants to use the actual loss data as well as the loss scenarios identified in the interviews. The group generated a portfolio of realistic loss scenarios, together with a view of the frequency and severity of each risk event. To supplement the discussions, expert judgment was also used to identify risk events applicable to the bank's situation, as well as their corresponding frequency and severity.
The output of the workshop was then modeled using advanced techniques, such as the Monte Carlo simulation method. Stress-testing was applied to compute the operational risk capital under stressed scenarios, and an aggregate loss distribution was generated to estimate the operational risk capital required at a given confidence level.

Business Benefits
In addition to giving the bank a far greater understanding of its operational risks and a clear focus on where to improve its risk management controls, Aptivaa's pilot exercise in the bank's retail banking group provided substantial capital benefit compared to that required using the standardised approach. The bank used this approach as a benchmark and roadmap to roll out a company-wide initiative to use the AMA for its operational risk capital calculation.