A practical application of extreme value theory to operational risk in banks

Hela Dahen, Georges Dionne (georges.dionne@hec.ca) and Daniel Zajdenweber

Journal of Operational Risk

Abstract: ABSTRACT Operational losses are true dangers for banks, since their maximal values to signal default are difficult to predict. In this paper, we analyze data from a very large US bank and show that it could suffer, on average, more than four major losses a year. The bank had seven losses exceeding hundreds of millions of dollars among its 52 documented losses of more than US$1 million over the 1994-2004 period. The tail of the loss distribution predicts that this bank is in danger of experiencing extreme operational losses ranging from $1 billion (with 1% probability) to $11 billion (0.1% probability). The corresponding annual insurance premiums are estimated to range from $350 million to almost $1 billion.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ3:2160846

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