Application of the Forgotten Effects Theory to the Qualitative Analysis of the Operational Risk Events

The second agreement of the Committee on Banking Supervision (Basel II) represents a challenge for financial institutions, risk managers and researchers in terms of operational risk management, due to the complexity of developing effective systems to identify, measure, monitor, control and mitigate this risk. This requires performing a lost scenario analysis with expert judgment to decide the priority actions in order to manage properly the different events of loss associated to the operational risk, as well as taking measures derived from loss distributions. In this paper, we have used the forgotten effects theory, which allows us to determine the causal direct and indirect relationships between the causes and effects of the operational losses of a financial institution, throughout the opinions of a group of experts.

Automated summary

This paper explores the challenges of Basel II's second agreement for financial institutions, risk managers, and researchers in terms of operational risk management, as well as how to use the forgotten effects theory to determine causal relationships between the causes and effects of operational losses.