Loss Distribution Approach for Operational Risk Capital Modelling under Basel II: Combining Different Data Sources for Risk Estimation

The management of operational risk in the banking industry has undergone significant changes over the last decade due to substantial changes in operational risk environment. Globalization, deregulation, the use of complex financial products and changes in information technology have resulted in exposure to new risks very different from market and credit risks. In response, Basel Committee for banking Supervision has developed a regulatory framework, referred to as Basel II, that introduced operational risk category and corresponding capital requirements. Over the past five years, major banks in most parts of the world have received accreditation under the Basel II Advanced Measurement Approach (AMA) by adopting the loss distribution approach (LDA) despite there being a number of unresolved methodological challenges in its implementation. Different approaches and methods are still under hot debate. In this paper, we review methods proposed in the literature for combining different data sources (internal data, external data and scenario analysis) which is one of the regulatory requirement for AMA

Dynamic Programming and Bayesian Inference

Dynamic programming and Bayesian inference have been both intensively and extensively developed during recent years. Because of these developments, interest in dynamic programming and Bayesian inference and their applications has greatly increased at all mathematical levels. The purpose of this book is to provide some applications of Bayesian optimization and dynamic programming

Day-ahead energy and reserve dispatch problem under non-probabilistic uncertainty

The current energy transition and the underlying growth in variable and uncertain renewable-based energy generation challenge the proper operation of power systems. Classical probabilistic uncertainty models, e.g., stochastic programming or robust optimisation, have been used widely to solve problems such as the day-ahead energy and reserve dispatch problem to enhance the day-ahead decisions with a probabilistic insight of renewable energy generation in real-time. By doing so, the scheduling of the power system becomes, production and consumption of electric power, more reliable (i.e., more robust because of potential deviations) while minimising the social costs given potential balancing actions. Nevertheless, these classical models are not valid when the uncertainty is imprecise, meaning that the system operator may not rely on a unique distribution function to describe the uncertainty. Given the Distributionally Robust Optimisation method, our approach can be implemented for any non-probabilistic, e.g., interval models rather than only sets of distribution functions (ambiguity set of probability distributions). In this paper, the aim is to apply two advanced non-probabilistic uncertainty models: Interval and ϵ-contamination, where the imprecision and in-determinism in the uncertainty (uncertain parameters) are considered. We propose two kinds of theoretical solutions under two decision criteria—Maximinity and Maximality. For an illustration of our solutions, we apply our proposed approach to a case study inspired by the 24-node IEEE reliability test system

Credit risk management of property investments through multi-criteria indicators

The economic crisis of 2008 has highlighted the ineffectiveness of the banks in their disbursement of mortgages which caused the spread of Non-Performing Loans (NPLs) with underlying real estate. With the methods stated by the Basel III agreements, aimed at improving the capital requirements of banks and determining an adequate regulatory capital, the banks without the skills required have difficulties in applying the rigid weighting coefficients structures. The aim of the work is to identify a synthetic risk index through the participatory process, in order to support the restructuring debt operations to benefit smaller banks and small and medium-sized enterprises (SME), by analyzing the real estate credit risk. The proposed synthetic risk index aims at overcoming the complexity of Basel III methodologies through the implementation of three different multi-criteria techniques. In particular, the integration of objective financial variables with subjective expert judgments into a participatory process is not that common in the reference literature and brings its benefits for reaching more approved and shared results in the debt restructuring operations procedure. Moreover, the main findings derived by the application to a real case study have demonstrated how important it is for the credit manager to have an adequate synthetic index that could lead to the avoidance of risky scenarios where several modalities to repair the credit debt occur

It's a Bird, It's a Plane: Some Remarks on the Airbus Appellate Body Report (EC and Certain Member States - Large Civil Aircraft, WT/DS316/AB/R)

The emergence of Airbus transformed the market structure of the LCA industry into a duopoly of similar-sized full-range manufacturers. The financing of Airbus's upfront investment expenditures came in a significant proportion from public funds, which violated, in the US's opinion the SCM Agreement. While the Appellate Body follows this view of things to a large extent, it does so in a measured way: the category of per se illegal export subsidies is interpreted with a view to the manipulation of normal market conditions; the distortion on competitive conditions matters, not the increase of exports as such. Other aspects of subsidies law clarified are the relationship between effect and subsidy. They are closely related but not identical; rightly, the report operates from the premise that the SCM Agreement's regime focuses on the effect, and not on the subsidy as such, which is a manifestation of a political choice by a sovereign Member state. The Appellate Body affirms that a subsidy has a ‘life', a shorthand for a beginning and an end: it follows that the effect of a subsidy is not bound to be permanent but is bound to terminate. It is to be regretted that the Appellate Body avoided clarifying to what extent partial privatization, hence sale of assets at market prices to private investors, ‘extinguish' subsidie

Soft Law as Foreign Relations Law

The United States increasingly relies on “soft law” and, in particular, on cooperation with foreign regulators to make domestic policy. The implementation of soft law at home is typically understood to depend on administrative law, as it is American agencies that implement the deals they conclude with their foreign counterparts. But that understanding has led courts and scholars to raise questions about whether soft law made abroad can possibly meet the doctrinal requirements of the domestic discipline. This Article proposes a new doctrinal understanding of soft law implementation. It argues that, properly understood, soft law implementation lies at the intersection of foreign relations law and administrative law. In light of the strong powers accorded to the executive under foreign relations law, this new understanding will strengthen the legitimacy and legality of soft law implementation and make it less subject to judicial challenge. Understanding that soft law is foreign relations law will further the domestic implementation of informal international agreements in areas as different as conflict diamonds, international financial regulation, and climate change

Strategies of Flexible Integration and Enlargement of the European Union: a Club-theoretical and Constitutional Economics Perspective

Our paper proceeds as follows: As a point of departure, part two highlights the heterogeneity among EU member states following the recent enlargement, while part three reviews three main alternative conceptions of flexible integration as they were discussed in political circles. Part four applies Buchanan's and Tullock's Calculus of Consent (1962) to the tension between deepening and widening the EU. Part five introduces basic elements of the economic theory of clubs, analyzes the notion of the EU as a club and examines flexible integration in a club-theoretical framework. Part six considers several alternative integration models in view of the conclusions of both club theory and constitutional economics, while part seven focuses more specifically on a club-of-clubs approach that we tend to favour as an ideal-type model for a European Union of the future. Part eight evaluates the relative weaknesses and strengths of flexible integration according to the club-of-clubs approach and part nine advocates some further institutional recommendations before part ten concludes. --

Financial crises and bank failures: a review of prediction methods

In this article we provide a summary of empirical results obtained in several economics and operations research papers that attempt to explain, predict, or suggest remedies for financial crises or banking defaults, as well as outlines of the methodologies used. We analyze financial and economic circumstances associated with the US subprime mortgage crisis and the global financial turmoil that has led to severe crises in many countries. The intent of the article is to promote future empirical research that might help to prevent bank failures and financial crises.financial crises; banking failures; operations research; early warning methods; leading indicators; subprime markets

Multi-Objective and Multi-Attribute Optimisation for Sustainable Development Decision Aiding

Optimization is considered as a decision-making process for getting the most out of available resources for the best attainable results. Many real-world problems are multi-objective or multi-attribute problems that naturally involve several competing objectives that need to be optimized simultaneously, while respecting some constraints or involving selection among feasible discrete alternatives. In this Reprint of the Special Issue, 19 research papers co-authored by 88 researchers from 14 different countries explore aspects of multi-objective or multi-attribute modeling and optimization in crisp or uncertain environments by suggesting multiple-attribute decision-making (MADM) and multi-objective decision-making (MODM) approaches. The papers elaborate upon the approaches of state-of-the-art case studies in selected areas of applications related to sustainable development decision aiding in engineering and management, including construction, transportation, infrastructure development, production, and organization management