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Errors Found in Study Notes P2.T7. Operational & Integrated Risk

RaDi7

Active Member
#21
Hi David, hi Nicole,

I think there are several typos in the chapter 15 "Basel I, II, and Solvency II". On p. 14 there is a table which shows risk weights for different ratings. However in the examples under the table I cannot understand why different weights are used than those in the table:

upload_2017-10-8_14-25-37.png




upload_2017-10-8_14-21-58.png

Also on the same page in the Example 3 a risk weight of 50% is used for the rating AAA. I think the corresponding rating should be A+, A or A-:
upload_2017-10-8_14-30-42.png

Thank you for clarifying this.

Best regards!

 

David Harper CFA FRM

David Harper CFA FRM (test)
Staff member
#22
Hi @RaDi7 Thank you. The two paragraphs below the table are meant to alternatives to the table so they don't match, but nonetheless, it's obviously not clearly explained to what situations and how exactly they are applied. The solution given does contain a typo, exactly as you highlighted, and should be Rating = A (to correspond to the 50% risk weight). Apologies for such a confusing table. We actually currently are editing the note for a revision (cc @Nicole Seaman ) so we will improve this section especially. Thank you!
 

RaDi7

Active Member
#23
Hi @RaDi7 Thank you. The two paragraphs below the table are meant to alternatives to the table so they don't match, but nonetheless, it's obviously not clearly explained to what situations and how exactly they are applied. The solution given does contain a typo, exactly as you highlighted, and should be Rating = A (to correspond to the 50% risk weight). Apologies for such a confusing table. We actually currently are editing the note for a revision (cc @Nicole Seaman ) so we will improve this section especially. Thank you!
Hi David,
thank you for your reply. Sorry, I misunderstood the text in the study notes. I should have read it more carefully where you talk about the alternative to the table above. Thank you for the explanation!
Best regards!
 

Karim_B

Active Member
#24
hi @Roopam
  1. The notes look correct here. It is a difference between BIA and SA: BIA excludes a negative year (from numerator and denominator) such that dividing by 2 is correct; but SA converts the negative into zero (such that dividing by 3 is correct). If there is a negative, as in the example, there is a different outcome
  2. I agree, the text description is incorrect, sorry, but the calculated Example 2 is correct: first, the weighted gross income (GI) for "Year 1" is computed by summing the product of each business lines' [GI_Yr1(1...8) * β(1...8)]; i.e., aggregation of all LOB across year 1; second, the weighted gross income (GI) for "Year 2" is computed by summing the product of each business lines' [GI_Yr2(1...8) * β(1...8)]; i.e., aggregation of all LOB across year 2; finally, same for year 3. Finally, if any of the totals for the year (year 1, year 2, year 3) are negative they are converted to zero and the denominator remains equal to 3. Sorry for the confusion, we will fix this is the next update. Thank you!
Hi @David Harper CFA FRM @Nicole Seaman
It looks like the fix mentioned in point 2 above hasn't been made yet.

R55.P2.T7 Girling Study Note page 7.

Screenshot:
upload_2018-4-8_19-15-30.png

Thanks
Karim
 

Karim_B

Active Member
#25
Hi David,

In your study notes for this (page 103) you have GEV down as needing a threshold (u) parameter. I think this should be removed.

Thanks
Hi @David Harper CFA FRM
I don't think this has been fixed yet.

R57.P2.T7.Dowd Study Note page 7 still shows "Plus select threshold (u)" under GEV, which confused me when the POT disadvantage below says the threshold isn't a problem with GEV.

Screenshot:
GEV distribution.png

Thanks
Karim
 

David Harper CFA FRM

David Harper CFA FRM (test)
Staff member
#29
@Karenly Yes, you are correct, but I don't see ROE = income on page 19, sorry. I see Profit/Equity per Malz Example 12.1. And equivalently ROE = ROA - [D * r(d)]. I don't see the typo but ROE is Income/Equity (either pretax or after-tax income).
 
Last edited:
#30
On Page 19, I see ROE = A * r(a) - D * r(d) = 0.15 (as an example) where r(a) = return on asset, and r(d) = cost of debt. My confusion is that I thought ROE = [A * r(a) - D * r(d)] / E and [A * r(a) - D * r(d)] = income?

@Karim_B You are correct, but I don't see ROE = income on page 19, sorry. I see Profit/Equity per Malz Example 12.1. And equivalently ROE = ROA - [D * r(d)]. I don't see the typo but ROE is Income/Equity (either pretax or after-tax income).
 

David Harper CFA FRM

David Harper CFA FRM (test)
Staff member
#31
@Karenly Oh, I see now ... Yes, we do have a mistake in the note. As we are following Malz, it actually should use the prior formula on page 18: L*r(a) - (L-1)*r(d); i.e., in this case where Leverage = A/E = 2.0, r(a) = 10.0% and cost of debt r(d) = 5.0%, ROE = 2.0*10.0% - (2-1)*5.0% = 15.0%. Or, equivalently, just as you say ROE = [A * r(a) - D * r(d)]/E. Apologies for the confusion. (cc @Nicole Seaman). Thanks,
 

David Harper CFA FRM

David Harper CFA FRM (test)
Staff member
#33
Hi @Ashok_Kothavle Right, but those Principles do not appear to be explicated in the Learning Objectives, which I have listed below, plus brief annotation:

Principles for the Sound Management of Operational Risk,” (Basel Committee on Banking Supervision Publication, June 2011). [OR–1]
  • Describe the three “lines of defense” in the Basel model for operational risk governance. --> Preface/preamble
  • Summarize the fundamental principles of operational risk management as suggested by the Basel Committee. --> Principles 1 & 2
  • Explain guidelines for strong governance of operational risk, and evaluate the role of the board of directors and senior management in implementing an effective operational risk framework. --> Principles 3 to 5
  • Describe tools and processes that can be used to identify and assess operational risk. --> Principle 6
  • Describe features of an effective control environment and identify specific controls that should be in place to address operational risk. --> Principle 9, 9.47 to 9.4X
  • Explain the Basel Committee’s suggestions for managing technology risk and outsourcing risk. --> Principle 9.51-53 (technology) and Principle 9.54-9.56
Let me know if you disagree? Thanks!
 
#34
Dear Mr David,

Thanks a lot for your explanation. I try to read the original chapter / paper before I start reading BT or any other resource. Hence, the confusion occurred. Thanks again.

Regards

Ashok
 
#35
Hi Mr David

Please refer to the study notes under "Revisions to the Basel II Market Risk Framework" page no 5.

1548058166769.png


You have rightly mentioned that the specific risk charge is 8%, however, the last column is misleading as the Capital Charge under both the long and short positions have been computed at 4% and not at 8%. You have already mentioned as a footnote that revised framework has updated the charges to 8%, however, I feel may be you can think of changing the last column also, as values w.r.t specific risk charges otherwise are misleading.

(Also, sorry as I am not sure if this can be posted as a new thread. May be Ms Nicole can shift it to the appropriate thread if the need be.)

Regards

Ashok
 
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