Key principles for operational risk stress testing design and evaluation

Eric Cope

Journal of Operational Risk

Abstract: Current stress testing frameworks for operational risk often lack clarity with respect to measurement standards and the balance to be struck between systemic (macroeconomic) and idiosyncratic risk factors in the test design and evaluation. This paper surveys different approaches that have applied in different jurisdictions, and it provides a conceptual framework for designing operational risk stress tests to a desired likelihood standard that can achieve a full and balanced coverage of a bank’s material operational risks.

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