Practical methods for measuring and managing operational risk in the financial sector: a clinical study

Georges Hübner and Jean-Philippe Peters ()

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

Abstract: This paper analyzes the implications of the advanced measurement approach (AMA) for the assessment of operational risk. Through a clinical case study on a matrix of two selected business lines and two event types of a large financial institution, we develop a procedure that addresses the major issues faced by banks in the implementation of the AMA. For each cell, we calibrate two truncated distributions functions, one for "normal" losses and the other for the "extreme" losses. In addition, we propose a method to include external data in the framework. We then estimate the impact of operational risk management on bank profitability, through an adapted measure of RAROC. The results suggest that substantial savings can be achieved through active management techniques. © 2007 Elsevier B.V. All rights reserved.

Keywords: Advanced measurement approaches; Extreme value theory; Operational risk; RAROC; Risk management (search for similar items in EconPapers)
Date: 2008
Note: SCOPUS: ar.j
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Citations: View citations in EconPapers (20)

Published in: Journal of Banking & Finance (2008) v.32,p.1049-1061

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Journal Article: Practical methods for measuring and managing operational risk in the financial sector: A clinical study (2008)
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