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Measuring operational risk in financial institutions

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  • Séverine Plunus
  • Georges Hübner
  • Jean-Philippe Peters

Abstract

The scarcity of internal loss databases tends to hinder the use of the advanced approaches for operational risk measurement (Advanced Measurement Approaches (AMA)) in financial institutions. As there is a greater variety in credit risk modelling, this article explores the applicability of a modified version of CreditRisk+ to operational loss data. Our adapted model, OpRisk+, works out very satisfying Values-at-Risk (VaR) at 95% level as compared with estimates drawn from sophisticated AMA models. OpRisk+ proves to be especially worthy in the case of small samples, where more complex methods cannot be applied. OpRisk+ could therefore be used to fit the body of the distribution of operational losses up to the 95%-percentile, while Extreme Value Theory (EVT), external databases or scenario analysis should be used beyond this quantile.

Suggested Citation

  • Séverine Plunus & Georges Hübner & Jean-Philippe Peters, 2012. "Measuring operational risk in financial institutions," Applied Financial Economics, Taylor & Francis Journals, vol. 22(18), pages 1553-1569, September.
  • Handle: RePEc:taf:apfiec:v:22:y:2012:i:18:p:1553-1569
    DOI: 10.1080/09603107.2012.667546
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    References listed on IDEAS

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    1. Patrick de Fontnouvelle & Eric Rosengren & John Jordan, 2007. "Implications of Alternative Operational Risk Modeling Techniques," NBER Chapters,in: The Risks of Financial Institutions, pages 475-512 National Bureau of Economic Research, Inc.
    2. 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.
    3. de Fontnouvelle, Patrick & Dejesus-Rueff, Virginia & Jordan, John S. & Rosengren, Eric S., 2006. "Capital and Risk: New Evidence on Implications of Large Operational Losses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1819-1846, October.
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