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Volume 5/Issue 2, Summer 2010 Research Papers A practical application of extreme value theory to operational risk in banks Hela Dahen
National Bank of Canada, 600 de la Gauchetière Ouest, Montréal, Quebec, H3B 4L2, Canada; email: hela.dahen@bnc.ca Georges Dionne
Department of Finance, HEC Montréal, 3000 chemin de la Côte-Sainte-Catherine, Montréal, Quebec, H3T 2A7, Canada; email: georges.dionne@hec.ca Daniel Zajdenweber
Université Paris Ouest Nanterre La Défense, 200 avenue de la République, 92001 Nanterre cedex, France; email: zajdeweb@noos.fr 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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