Operational Risk Management and Implications for Bank’s Economic Capital – a Case Study
AbstractIn this paper we review the actual operational data of an anonymous Central European Bank, using two approaches described in the literature: the loss distribution approach and the extreme value theory (“EVT”). Within the EVT analysis, two estimation methods were applied; the standard maximum likelihood estimation method and the probability weighted method (“PWM”). Our results proved a heavy-tailed pattern of operational risk data consistent with the results documented by other researchers in this field. Additionally, our research demonstrates that the PWM is quite consistent even when the data is limited since our results provide reasonable and consistent capital estimates. From a policy perspective, it should be noted that banks from emerging markets such as Central Europe are exposed to these operational risk events and that successful estimates of the likely distribution of these risk events can be derived from more mature markets.
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Bibliographic InfoPaper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2008/17.
Length: 32 pages
Date of creation: Sep 2008
Date of revision: Sep 2008
operational risk; economic capital; Basel II; extreme value theory; probability weighted method;
Find related papers by JEL classification:
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-20 (All new papers)
- NEP-EFF-2008-09-20 (Efficiency & Productivity)
- NEP-FMK-2008-09-20 (Financial Markets)
- NEP-RMG-2008-09-20 (Risk Management)
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- Milan Rippel & Petr Teplý, 2011.
"Operational Risk - Scenario Analysis,"
Prague Economic Papers,
University of Economics, Prague, vol. 2011(1), pages 23-39.
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