Issue: Volume 5/Issue 2, Summer 2010 Comment LETTER FROM THE EDITOR-IN-CHIEF Welcome to the second issue of the fifth volume of The Journal of Operational Risk. Summer is finally knocking on our doors and before we all go on our welldeserved vacations, I would like to announce another new addition to our editorial board. We welcome Evan Sekeris from the Federal Reserve Bank of Richmond. Evan has been working in the operational risk industry for many years, validating measurement frameworks, risk governance and policies. I trust that most readers would have met him or at least heard from him in one of the seminars in which he participates every year. We have a challengi ...
Issue: Volume 5/Issue 2, Summer 2010 Research Papers Calculation of aggregate loss distributions Estimation of the operational risk capital under the loss distribution approach requires evaluation of aggregate (compound) loss distributions, which is one of the classic problems in risk theory. Closed-form solutions are not available for the distributions typically used in operational risk; however, with modern computer processing power these distributions can be calculated virtually exactly using numerical methods. This paper reviews numerical algorithms that can be successfully used to calculate the aggregate loss distributions. In particular, Monte Carlo, Panjer recursion and Fourier tra ...
Issue: Volume 5/Issue 2, Summer 2010 Research Papers The credit crisis and operational risk - implications for practitioners and regulators The fallout from the financial crisis has illustrated that many sources of systemic risk were triggered or at least propagated by vulnerabilities in operational risk management (ORM), which has not kept pace with financial innovation, and an excessive focus of regulation on prudential requirements without recognition of substantial operational risk in marketbased liquidity transformation. At the same time, institutions are at different stages of systems development and show considerable dispersion in ORM practices while falling short of integrating operational risk as a horizontal process. Thi ...
Issue: Volume 5/Issue 2, Summer 2010 Research Papers A practical application of extreme value theory to operational risk in banks 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). ...
Issue: Volume 5/Issue 2, Summer 2010 Research Papers The measurement of capital for operational risk in Taiwanese commercial banks From the loss data associated with the significant operational risks of Taiwanese commercial banks during the period from 1995 to 2009, we collected a set of 323 observations to use for modeling and estimating tail parameters of the banks' operational loss distribution. By means of three copula functions, we calculated correlations between event pairs, tested for independence between different classifications of risk types in the Basel II framework and sought to understand the characteristics and concentration of commercial banks' operational risks. Further, we estimated parameters for the gen ...
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