Page 212 - DCAP304_DCAP515_SOFTWARE_PROJECT_MANAGEMENT

Software Project Management

Notes
Another forward-looking scenario generation approach for op-risk measurement is Loss
Scenario Modelling, which involves generating simulations for loss scenarios based on
the events and losses captured in the first step.
Basel II norms suggest three approaches for measurement of op-risk. The simplest approach,
best suited for less sophisticated and small balance-sheet banks, is the Basic Indicator
Approach (BIA). BIA requires banks to allocate capital based on a single indicator of
operational risk, which in this case will be average gross income of past three years
multiplied by factor called alpha, which is set at 15 per cent.

The second approach is the Standardised Approach (SA), which involves mapping the
bank’s business lines to the set of eight business lines and use multiplier (Beta) of average
gross income to compute capital charge.
Also, there is the Alternative Standardised Approach (ASA), which uses loans and advances,
instead of gross income, for retail banking and commercial banking business lines
multiplied by fixed factor which results in capital charge to be set aside.
The most sophisticated approach suggested is advanced measurement approach (AMA).
Under the AMA, the regulatory capital requirement will equal the risk measures generated
by the bank’s internal operational risk measurement system using quantitative and
qualitative criteria for the AMA. Internal data used must be based on a minimum historical
observation period of five years. However, when a bank first moves to AMA, a three-year
period is acceptable.
Banks need to employ the quantitative approaches like Internal Measurement Approach
(IMA) or Loss Distribution Approach (LDA) or Balance Scorecard Approach (BSA) for
adopting AMA. All AMA approaches compute the expected and unexpected loss. The most
significant aspect for a bank to graduate from Basic Indicator Approach (BIA) to Advanced
Measurement Approach (AMA) is the potential benefit of less capital allocation for
operational risk.

As op-risk involves failures during operations in daily business, the key steps in op-risk
management involve improving internal control environment, designing and developing
procedures to implementing the risk management processes and employing risk transfer
techniques, such as insurance, to mitigate the loss arising from operational risk. Credit
rating agencies have started rating banks based on their risk control and management
frameworks. Investor awareness has also increased to the extent that banks with robust
risk management frameworks are able to attract strategic investments with less effort.
Given the known benefits of implementing the provisions of the Basel II accord, banks
should prioritise their strategy towards op-risk management. A constructive approach in
this direction could be to automate the suggested five-step approach and, as a first step, to
start developing a loss event database.

10.11 Summary

 Software project managers need to manage risk and use every tool available to them for
this management.

 If they can use a tool that is already being used on their project for other purposes, they
save themselves time and money.
 Most managers use some form of a metrics program to track their project for cost, schedule,
effort, and quality.

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