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An analysis on operational risk in international banking: A Bayesian approach (2007–2011)

Author

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  • Francisco Venegas-Martínez
  • José Francisco Martínez-Sánchez
  • María Teresa V. Martínez-Palacios

Abstract

This study aims to develop a Bayesian methodology to identify, quantify and measure operational risk in several business lines of commercial banking. To do this, a Bayesian network (BN) model is designed with prior and subsequent distributions to estimate the frequency and severity. Regarding the subsequent distributions, an inference procedure for the maximum expected loss, for a period of 20 days, is carried out by using the Monte Carlo simulation method. The business lines analyzed are marketing and sales, retail banking and private banking, which all together accounted for 88.5% of the losses in 2011. Data was obtained for the period 2007–2011 from the Riskdata Operational Exchange Association (ORX), and external data was provided from qualified experts to complete the missing records or to improve its poor quality.

Suggested Citation

  • Francisco Venegas-Martínez & José Francisco Martínez-Sánchez & María Teresa V. Martínez-Palacios, 2016. "An analysis on operational risk in international banking: A Bayesian approach (2007–2011)," Estudios Gerenciales, Universidad Icesi, vol. 32(140), pages 208-220, September.
    • Handle: RePEc:col:000129:015179
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    References listed on IDEAS

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    4. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
    5. Marco Moscadelli, 2004. "The modelling of operational risk: experience with the analysis of the data collected by the Basel Committee," Temi di discussione (Economic working papers) 517, Bank of Italy, Economic Research and International Relations Area.
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    Cited by:

    1. Sophia Beckett Velez, 2021. "Idiosyncratic Viral Loss Theory: Systemic Operational Losses in Banks," JRFM, MDPI, vol. 14(2), pages 1-13, February.
    2. José Ruiz-Canela López, 2021. "How Can Enterprise Risk Management Help in Evaluating the Operational Risks for a Telecommunications Company?," JRFM, MDPI, vol. 14(3), pages 1-26, March.

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    More about this item

    Keywords

    Operational risk; Bayesian analysis; Monte Carlo simulation;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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