Operational Risk Modelling and Management, by Claudio Franzetti, 2011, Boca Raton, FL: Chapman & Hall/CRC Press, 389 pp. ISBN: 978‐1‐4398‐4476‐2.

• Date: 01 December 2014
• DOI: http://doi.org/10.1111/jori.12073
• Published date: 01 December 2014

BOOK REVIEW

Operational Risk Modelling and Management, by Claudio Franzetti, 2011, Boca Raton, FL:

Chapman & Hall/CRC Press, 389 pp. ISBN: 978-1-4398-4476-2.

Reviewer: Zeinab Amin, Associate Professor, Department of Mathematics and

Actuarial Science at the American University in Cairo and Associate of the Society of

Actuaries; zeinabha@aucegypt.edu

This book is part of the Chapman & Hall/CRC Finance Series that aims to present the

latest research and applications in the rapidly expanding field of finance. A goal of the

series is to put theory into context using concrete real-world case studies. Claudio

Franzetti is currently chief risk officer of Swiss Export Risk Insurance in Zurich and

president of Garrulus Enterprise Ltd. Prior to his current position, Franzetti held

several senior positions in investments and risk management with Aon Resolution

AG, Deutsche Bank, Swiss Re, and Iris AG.

Building on the theoretical foundation of probability theory and existing concepts in

the world of risk calculation, risk mitigation, and management, Franzetti describes an

integrated framework to quantify operational risk capital and provide a risk

mitigation management plan. The model uses the loss distribution approach and is

intended to fulfill all requirements of the Basel accord. The heart of the book consists

of four chapters.

Chapter 1 gives a general overview of operational risk. Franzetti begins by posing the

interesting question: “Why regulate banks?” He provides background on different

explanations for the existence of bank regulation, taking into account the opposing

viewpoint, which argues that strengthening supervision has a neutral or negative

impact on banking development, reduces bank efficiency, and increases the

likelihood of a crisis. Franzetti concludes that it cannot be perceived from experience

whether regulation produces real benefit. To end he writes, “Regulation must

therefore be accepted as a fact of life” (p. 3). Franzetti also points out that banks with

international operations can suffer from a compliance burden, not only due to

overregulation, but also from the overlapping supervision of banks across borders

that results from the unsystematic manner in which regulation is imposed.

Franzetti gives background details on the three pillars of the Basel accord and

describes the three options provided for operational risk quantification, including

different views on their strengths and weaknesses. In his definition of risk, Franzetti

only provides discussion of negative events, however, overlooking the fact that risk is

DOI: 10.1111/jori.12073

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© The Journal of Risk and Insurance, 2014, Vol. 81, No. 4, 969–973