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

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  • Chapelle, Ariane
  • Crama, Yves
  • Hübner, Georges
  • Peters, Jean-Philippe

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 6 (June)
Pages: 1049-1061

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:6:p:1049-1061

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References

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  1. Drees, Holger & Kaufmann, Edgar, 1998. "Selecting the optimal sample fraction in univariate extreme value estimation," Stochastic Processes and their Applications, Elsevier, Elsevier, vol. 75(2), pages 149-172, July.
  2. Chavez-Demoulin, V. & Embrechts, P. & Neslehova, J., 2006. "Quantitative models for operational risk: Extremes, dependence and aggregation," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(10), pages 2635-2658, October.
  3. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 56(2), pages 649-676, 04.
  4. Frachot, Antoine & Roncalli, Thierry & Salomon, Eric, 2004. "The Correlation Problem in Operational Risk," MPRA Paper 38052, University Library of Munich, Germany.
  5. Hurlimann, Werner, 2004. "Fitting bivariate cumulative returns with copulas," Computational Statistics & Data Analysis, Elsevier, Elsevier, vol. 45(2), pages 355-372, March.
  6. 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), Bank of Italy, Economic Research and International Relations Area 517, Bank of Italy, Economic Research and International Relations Area.
  7. Huisman, Ronald, et al, 2001. "Tail-Index Estimates in Small Samples," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 19(2), pages 208-16, April.
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Cited by:
  1. Brechmann, Eike & Czado, Claudia & Paterlini, Sandra, 2014. "Flexible dependence modeling of operational risk losses and its impact on total capital requirements," Journal of Banking & Finance, Elsevier, Elsevier, vol. 40(C), pages 271-285.
  2. Dahen, Hela & Dionne, Georges, 2010. "Scaling models for the severity and frequency of external operational loss data," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(7), pages 1484-1496, July.
  3. Chang, Carolyn W. & Chang, Jack S.K. & Lu, WeLi, 2010. "Pricing catastrophe options with stochastic claim arrival intensity in claim time," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(1), pages 24-32, January.
  4. Wang, Zongrun & Wang, Wuchao & Chen, Xiaohong & Jin, Yanbo & Zhou, Yanju, 2012. "Using BS-PSD-LDA approach to measure operational risk of Chinese commercial banks," Economic Modelling, Elsevier, vol. 29(6), pages 2095-2103.
  5. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers) 99, Bank of Italy, Economic Research and International Relations Area.
  6. Stefan Mittnik & Sandra Paterlini & Tina Yener, 2011. "Operational–risk Dependencies and the Determination of Risk Capital," Center for Economic Research (RECent), University of Modena and Reggio E., Dept. of Economics 070, University of Modena and Reggio E., Dept. of Economics.
  7. Elshahat, A. & Parhizgari, Ali & Hong, Liang, 2012. "The information content of the Banking Regulatory Agencies and the Depository Credit Intermediation Institutions," Journal of Economics and Business, Elsevier, Elsevier, vol. 64(1), pages 90-104.

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