Commenced in January 2007
Frequency: Monthly
Edition: International
Paper Count: 30184
Operational Risk – Scenario Analysis

Authors: Milan Rippel, Petr Teply

Abstract:

This paper focuses on operational risk measurement techniques and on economic capital estimation methods. A data sample of operational losses provided by an anonymous Central European bank is analyzed using several approaches. Loss Distribution Approach and scenario analysis method are considered. Custom plausible loss events defined in a particular scenario are merged with the original data sample and their impact on capital estimates and on the financial institution is evaluated. Two main questions are assessed – What is the most appropriate statistical method to measure and model operational loss data distribution? and What is the impact of hypothetical plausible events on the financial institution? The g&h distribution was evaluated to be the most suitable one for operational risk modeling. The method based on the combination of historical loss events modeling and scenario analysis provides reasonable capital estimates and allows for the measurement of the impact of extreme events on banking operations.

Keywords: operational risk, scenario analysis, economic capital, loss distribution approach, extreme value theory, stress testing

Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1082199

Procedia APA BibTeX Chicago EndNote Harvard JSON MLA RIS XML ISO 690 PDF Downloads 1618

References:


[1] Arai T (2006): Key points of scenario analysis, Bank of Japan, 2006, http://www.boj.or.jp/en/type/release/zuiji_new/data/fsc0608be2.pdf
[2] BCBS (2006): International Convergence of Capital Measurement and Capital Standards, A Revised Framework, Comprehensive Version, Basel Committee on Banking Supervision, Bank for International Settlement, Basel June 2006, http://www.bis.org/publ/bcbs128.pdf
[3] Chalupka R, TeplÛ P (2008): Operational Risk Management and Implications for Bank-s Economic Capital - A Case Study, IES Working Papers 17/2008, http://ies.fsv.cuni.cz/sci/publication/show/id/3477/lang/cs
[4] Chernobai A, Rachev S, Fabozzi F (2007): Operational Risk. A Guide to Basel II Capital Requirements, Models and Analysis, John Willey & Sons, Inc., March 2007, ISBN: 0470148780
[5] Cihak M (2004): Designing Stress Tests for the Czech Banking System, CNB Internal Research and Policy Note 03/2004, http://www.cnb.cz/en/research/research_publications/irpn/download/irpn _3_2004.pdf
[6] de Fontnouvelle P, Jordan J, Rosengren E (2005): Implications of Alternative Operation Risk Modeling Techniques, NBER Working Paper Series, Cambridge February 2005 http://www.nber.org/papers/w11103.pdf
[7] de Fontnouvelle P, de Jesus-Rueff V, Jordan J, Rosengren E (2003): Using Loss Data to Quantify Operational Risk, Technical report, Federal Reserve Bank of Boston and Fitch Risk
[8] Degen M, Embrechts P, Lambrigger D (2007): The Quantitative Modelling of Operational Risk: Between g-and-h and EVT, ETH Zurich 2007, http://www.math.ethz.ch/~degen/g-and-h.pdf
[9] Dutta K, Perry J (2007): A Tale of Tails: An Empirical Analysis of Loss Distribution Models for Estimating Operational Risk Capital, Working Paper 06-13, Federal Reserve Bank of Boston, Boston January 2007, http://www.bos.frb.org/economic/wp/wp2006/wp0613.pdf
[10] Embrechts P, Frey R, McNeil A (2005): Quantitative Risk Management: Concepts, Techniques and Tools, Princeton Series in Finance
[11] Jorion P (2007): Value at Risk: The New Benchmark for Managing Financial Risk, 3rd edition, McGraw-Hill 2007
[12] Kuhn R, Neu P (2004): Adequate capital and stress testing for operational risks, Dresdner Bank AG 2004, http://www.gloriamundi.org/picsresources/rkpn2.pdf
[13] Mejstř├¡k M, Pe─ìen├í M, Tepl├¢ P (2008): "Basic Principles of Banking", Karolinum Press, Prague.
[14] Mignola G, Ugoccioni R (2007): Statistical Approach to Operational Risk Management, Sampolo IMI Group Italy 2007, http://www.rproject. org/user-2006/Abstracts/Mignola+Ugoccioni.pdf
[15] Rippel M (2008): Operational Risk - Scenario Analysis, IES FSV UK Diploma Thesis 2008
[16] Rippel M, TeplÛ P (2010): "Stress Testing and Scenario Analysis", VDM Verlag, Saarbrücken, Germany
[17] TeplÛ P (2010): "THE TRUTH ABOUT THE 2008-2009 CRISIS: A Hard Lesson for The Global Markets", VDM Verlag, Saarbrücken, Germany
[18] Rosengren E (2006): Scenario analysis and the AMA, Federal Reserve Bank of Boston, 2006, http://www.bos.frb.org/bankinfo/qau/presentations/2006/er71906.pdf