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Operational Risk Management and Implications for Bank’s Economic Capital – a Case Study

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Abstract

In 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.

Suggested Citation

  • Radovan Chalupka & Petr Teply, 2008. "Operational Risk Management and Implications for Bank’s Economic Capital – a Case Study," Working Papers IES 2008/17, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Sep 2008.
  • Handle: RePEc:fau:wpaper:wp2008_17
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    File URL: http://ies.fsv.cuni.cz/default/file/download/id/8933
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    Cited by:

    1. Milan Rippel & Petr Teplý, 2011. "Operational Risk - Scenario Analysis," Prague Economic Papers, University of Economics, Prague, vol. 2011(1), pages 23-39.

    More about this item

    Keywords

    operational risk; economic capital; Basel II; extreme value theory; probability weighted method;

    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

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