RISK EVENT Iisaaksiichaa Ross Braine Mid-Career MSIM Candidate IMT 556A February 5, 2015

Basel II Operational Risk Event Categories INTERNAL LOSS DATA – RISK EVENT CATEGORIES Basel II Operational Risk Event Categories Event-Type Category (Level 1) Definition Internal Fraud losses due to acts of a type intended to defraud, misappropriate property, or circumvent regulations, the law, or company policy, excluding diversity/discrimination events, which involves at least one internal party External Fraud losses due to acts of a type intended to defraud, misappropriate property, or circumvent the law, by a third party Employment Practices and Workplace Safety losses arising from acts inconsistent with employment, health, or safety laws or agreements, from payment of personal injury claims, or from diversity/discrimination events Clients, Products, and Business Practices losses arising from an unintentional or negligent failure to met a professional obligation to specific clients (including fiduciary and suitability requirements), or from the nature or design of a product Source: Girling, P. Operational Risk Management: A Complete Guide to a Successful Operational Risk Framework. Hoboken, NJ: Wiley, 2013.

Basel II Operational Risk Event Categories INTERNAL LOSS DATA – RISK EVENT CATEGORIES (Continued) Basel II Operational Risk Event Categories Event-Type Category (Level 1) Definition Damage to Physical Assets losses arising from loss or damage to physical assets from natural disaster or other events Business Disruption and System Failures losses arising from disruption of business or system failures Execution, Delivery, and Process Management losses from failed transaction processing or process management, from relations with trade counterparties and vendors Source: Girling, P. Operational Risk Management: A Complete Guide to a Successful Operational Risk Framework. Hoboken, NJ: Wiley, 2013.

VIDEO https://www.youtube.com/watch?v=ADBZw3-y2Qo

MELTDOWN AT CHERNOBYL BUILD UP TO MELTDOWN 1978 USSR unveils the first nuclear reactor near Chernobyl Sustained construction until 1983 when reactor No. 4 goes online April 25, 1986, No. 4 is scheduled to reduce production to half-power for routine maintenance During this lull, there is an experiment to test emergency equipment and cooling pumps Equivalent to airline pilots experiment with a plane’s engines in midflight Process goes wrong at approximately 11:00 p.m. Operators allow power production to drop too low At 1:00 a.m. reactor stabilizes 1:23 a.m. rods rupture and react with steam from coolant system, once the uranium comes in contact, boom! Source: Abkowitz, M. Operational Risk Management: A Case Study Approach to Effective Planning and Response. Hoboken, NJ: Wiley, 2008.

MELTDOWN AT CHERNOBYL LOCAL IMPACTS Nearby town, Pripyat, was not officially informed for 36 hours By the following week, 130,000 people were evacuated from a 19-mile area surrounding the site For 12 days radioactive material was released into upper atmosphere First media coverage didn’t occur until April 29 April 27-May 4 – responders fought blazes May 15 and 16 – new fires ignited 200,000 workers were exposed to high radiation levels 600,000 people would be involved in the cleanup $200 billion each in damages for Ukraine and Belarus Source: Abkowitz, M. Operational Risk Management: A Case Study Approach to Effective Planning and Response. Hoboken, NJ: Wiley, 2008.

MELTDOWN AT CHERNOBYL WORLDWIDE IMPACTS Radioactive plume spreads worldwide Most nations had no contingency plan for radiation threat Major issues with childhood leukemia and adult cancer cases, some may not appear for 30 years…or 2016 Sweden lost an estimated $144 million Austria lost an estimated $80 million Poland was hurt due to bans on potentially contaminated foods UK lost millions in livestock Source: Abkowitz, M. Operational Risk Management: A Case Study Approach to Effective Planning and Response. Hoboken, NJ: Wiley, 2008.

MELTDOWN AT CHERNOBYL HOW DID THIS HAPPEN? Human Error Schedule Constraints Poor Design Use of a graphite moderator which allowed the fission process to spiral out of control No way to deal with major power surge No containment structure Inability to follow standard operating practices Soviet government wanted to preserve national honor Propaganda used to motivate cleanup crews Citizens were forbidden to use measurement devices that checked radiation exposure Source: Abkowitz, M. Operational Risk Management: A Case Study Approach to Effective Planning and Response. Hoboken, NJ: Wiley, 2008.

MELTDOWN AT CHERNOBYL RESULTS Safety inspectors increased More stringent requirements New technology Enhanced training and better equipped responders International early-warning system At Cherynobyl Did not build two more reactors Decommissioned, December 15, 2000 Source: Abkowitz, M. Operational Risk Management: A Case Study Approach to Effective Planning and Response. Hoboken, NJ: Wiley, 2008.

WHICH RISK EVENT CATEGORY DOES THIS FALL UNDER? THOUGHTS WHICH RISK EVENT CATEGORY DOES THIS FALL UNDER? Internal Fraud External Fraud Employment Practices and Workplace Safety Clients, Products, and Business Practices Damage to Physical Assets Business Disruption and System Failures Execution, Delivery, and Process Management Source: Girling, P. Operational Risk Management: A Complete Guide to a Successful Operational Risk Framework. Hoboken, NJ: Wiley, 2013.

REFERENCES Girling, P. Operational Risk Management: A Complete Guide to a Successful Operational Risk Framework. Hoboken, NJ: Wiley, 2013. Abkowitz, M. Operational Risk Management: A Case Study Approach to Effective Planning and Response. Hoboken, NJ: Wiley, 2008.