Practical methods for measuring and managing operational risk in the financial sector: A clinical study

Abstract

This paper analyzes the implications of the Advanced Measurement Approach (AMA) for the assessment of operational risk. Through a clinical case study on a matrix of two selected business lines and two event types of a large financial institution, we develop a procedure that addresses the major issues faced by banks in the implementation of the AMA. For each cell, we calibrate two truncated distributions functions, one for "normal" losses and the other for the "extreme" losses. In addition, we propose a method to include external data in the framework. We then estimate the impact of operational risk management on bank profitability, through an adapted measure of RAROC. The results suggest that substantial savings can be achieved through active management techniques. for the assessment of operational risk. Through a clinical case study of a loss event matrix concerning two business lines and two event types for a large financial institution, we develop a procedure that addresses the major issues faced by banks in the implementation of the AMA. For each cell, we calibrate two truncated distributions functions, one for "normal" losses and the other for the "extreme" losses. In addition, we propose a method to include external data in the framework. We then estimate the impact of operational risk management on bank profitability, through an adapted measure of RAROC. The results suggest that substantial savings can be achieved through active management techniques. Keywords2

Modeling Operational Risk Based on Multiple Experts' Opinions

“…11. See, for instance, Chavez-Demoulin, Embrechts, and Neslehova (2006) or Chapelle et al (2008). 12.…”

“…Most of the literature on operational risk modeling focuses either on methods based on actual loss data, the so-called loss distribution approach (Chapelle et al 2008;Chavez-Demoulin, Embrechts, and Neslehova 2006;Cruz 2002;Frachot, Georges, and Roncalli 2001), or on application of h t t p : / / w w w…”

Operational Optimization for Microgrid of Buildings with Distributed Solar Power and Battery

“…What's more, for policy and technical reasons in the mainland China, local consumption of renewable energy is encouraged by the government. Considering these reasons, define as the one-day degree of self-sufficiency as in (22). From Fig.…”

Reduced form of the standard approach for operational risk for economic capital assessment

“…This characteristic of BIA and SA provides little help for the risk management process [Chapelle et al 2008]. One of widely used variants of AMA is based on the loss distribution approach which is well applied in insurance.…”