Journal
JOURNAL OF BANKING & FINANCE
Volume 32, Issue 6, Pages 1049-1061Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.jbankfin.2007.09.017
Keywords
operational risk; advanced measurement approaches; extreme value theory; RAROC; risk management
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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. (C) 2007 Elsevier B.V. All rights reserved.
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