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Operational Risk Management Using a Fuzzy Logic Inference System

Author

Listed:
  • Reveiz, Alejandro

    () (World Bank)

  • Carlos, Leon

    () (Banco de la República (Colombia's Central Bank))

Abstract

Operational Risk (OR) results from endogenous and exogenous risk factors, as diverse and complex to assess as human resources and technology, which may not be properly measured using traditional quantitative approaches. Engineering has faced the same challenges when designing practical solutions to complex multifactor and non-linear systems where human reasoning, expert knowledge, and imprecise information are valuable inputs. One of the solutions provided by engineering is a Fuzzy Logic Inference System (FLIS). The choice of a FLIS for OR assessment results in a convenient and sound use of qualitative and quantitative inputs, capable of effectively articulating risk management’s identication, assessment, monitoring, and mitigation stages. Different from traditional approaches, the proposed model allows for evaluating mitigation efforts ex-ante, thus avoiding concealed OR sources from system complexity build-up and optimizing risk management resources. Furthermore, because the model contrasts effective with expected OR data, it is able to constantly validate its outcome, recognize environment’s shifts, and issue warning signals.

Suggested Citation

  • Reveiz, Alejandro & Carlos, Leon, 2010. "Operational Risk Management Using a Fuzzy Logic Inference System," Journal of Financial Transformation, Capco Institute, vol. 30, pages 141-153.
  • Handle: RePEc:ris:jofitr:1436
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    References listed on IDEAS

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    1. Isabelle Huault & V. Perret & S. Charreire-Petit, 2007. "Management," Post-Print halshs-00337676, HAL.
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    Cited by:

    1. Carlos León & Clara Machado & Andrés Murcia, 2013. "Macro-prudential assessment of Colombian financial institutions’ systemic importance," Borradores de Economia 800, Banco de la Republica de Colombia.
    2. Peter Sarlin & Carlos León & Clara Machado & Andrés Murcia, 2016. "Assessing Systemic Importance With a Fuzzy Logic Inference System," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 23(1-2), pages 121-153, January.

    More about this item

    Keywords

    Operational Risk; Fuzzy Logic; Risk Management;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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