Case Studies - are all 7 examples of Operational Risk Failures?

[[email protected]]

While each case study emphasizes various risks (including market, liquidity, and credit risk), are they ALL examples of Operational Risk Failures?? You did not explicitly mention this in your notes or webinars.

Please correct me if I am wrong with any details of what category of Operational Risk these case studies fall under:

Barings: Rogue Trader (people risk)
Allied Irish: Rogue Trader (people risk)

Kidder Peabody: Misreporting of fake profits (People Risk) & not properly valuing the (PV) forward contracts(system flaw)

Chase Drysdale: Misreporting the PV of govt bonds and accrued income (system flaw)

Bankers Trust: Misconduct (people risk)

MGRM - Needed to stress test for exposure to large market moves (is this a case of model risk?)
LTCM - Needed to stress test for exposure to large market moves (is this a case of model risk?)

Also, if there is a system failure to properly value financial instruments and derivatives, and there are are traders or department heads that are aware of this, then there are BOTH system flaws/failures and people risk, right?

Thanks,
Theresa

 

[David Harper CFA FRM]

Hi Theresa, I hadn't thought of it this way but it seems to me that all seven cases do contain each at least a component of operational risk (e.g., while it may be "down the list" in LTMC and MGRM, it has certainly been itemized in both). I need to research P&G only because operational risk excludes reputation and strategy, but I think it's easily got a oprisk component. If you don't mind, I will reply in more detail next week: I really need to prep tomorrow's live webinar and a proper reply will take more time. Cheers, David

 

[[email protected]]

Since People Risk (an operational risk) is defined as Risk of losses due to people, rogue trading, fraud...and Bankers Trust sufferred large losses from the lawsuit due to their employees misconduct, I would say that it must definitely fall under the category of Operational Risk ...on account of legal risk and people risk.

Therefore, isn't the answer for Jorion Chapter 1 Question 22.1 incorrect?
(d) Bankers Trust - not a case of an operational risk failure

Yes, it is still an example of Reputation Risk, which is neither a business risk nor a financial risk.

Separately, if a crime (i.e. graffitti, trespassing, food stolen from a grocery store) is committed against an organization, and the fraudster is NOT an employee, is this considered operational {people} risk?

Thanks.

 

[sleepybird]

Hi,
This might be a stupid question, but is Joseph Jett in the Kidder Peabody considered a rogue trader? Does reporting false profits constitute a rogue trader? In the cases of Baring, Daiwa, Allied and Sumitomo, all of them made unauthorized trades (rogue traders). Thanks.