Measuring operational risk in financial institutions

S�verine Plunus, Georges Hübner and Jean-Philippe Peters

Applied Financial Economics, 2012, vol. 22, issue 18, 1553-1569

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.

Date: 2012
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DOI: 10.1080/09603107.2012.667546

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