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

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Huisman, Ronald, et al, 2001. "Tail-Index Estimates in Small Samples," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 208-16, April.
  2. Hurlimann, Werner, 2004. "Fitting bivariate cumulative returns with copulas," Computational Statistics & Data Analysis, Elsevier, vol. 45(2), pages 355-372, March.
  3. Chavez-Demoulin, V. & Embrechts, P. & Neslehova, J., 2006. "Quantitative models for operational risk: Extremes, dependence and aggregation," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2635-2658, October.
  4. Drees, Holger & Kaufmann, Edgar, 1998. "Selecting the optimal sample fraction in univariate extreme value estimation," Stochastic Processes and their Applications, Elsevier, vol. 75(2), pages 149-172, July.
  5. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
  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) 517, Bank of Italy, Economic Research and International Relations Area.
  7. Frachot, Antoine & Roncalli, Thierry & Salomon, Eric, 2004. "The Correlation Problem in Operational Risk," MPRA Paper 38052, University Library of Munich, Germany.
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