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http://ssrn.com/abstract=293179
 
 

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Modelling Operational Risk


Silvan Ebnöther


Zurich Cantonal Bank

Paolo Vanini


Zurich Cantonal Bank; University of Basel

Alexander McNeil


ETH Zürich - Department of Mathematics

Pierre Antolinez-Fehr


Zurich Cantonal Bank

December 1, 2001

Journal of Risk, Vol. 5, No. 3, pp. 1-16, 2003

Abstract:     
The Basel Committee on Banking Supervision ("the Committee") released a consultative document that included a regulatory capital charge for operational risk. The complexity of the object "operational risk" led from the time of the document's release to vigorous and recurring discussions. We show that for a production unit of a bank with well-defined workflow processes where a comprehensive self-assessment based on six risk factors has been carried out, operational risk can be unambiguously defined and modelled. Using techniques from extreme value theory, we calculate risk measures for independent and dependent risk factors, re-spectively. The results of this modelling exercise are relevant for the implementation of a risk management framework: Frequency dependence among the risk factors only slightly changes the independency results, severity dependence on the contrary changes the independency results significantly, the risk factor "fraud" dominates all other factors and finally, only 10 percent of all processes have a 98 percent contribution to the resulting VaR. Since the definition and maintenance of processes is very costly, this last results is of major practical relevance. Performing a sensitivity analysis, it turns out that the key 10% of relevant processes is rather robust under this stress testing.

Number of Pages in PDF File: 23

Keywords: Operational Risk, Risk Management, Extreme Value Theory, VaR

JEL Classification: C19, C69, G18, G21

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Date posted: December 11, 2001 ; Last revised: January 6, 2010

Suggested Citation

Ebnöther, Silvan and Vanini, Paolo and McNeil, Alexander and Antolinez-Fehr, Pierre, Modelling Operational Risk (December 1, 2001). Journal of Risk, Vol. 5, No. 3, pp. 1-16, 2003. Available at SSRN: http://ssrn.com/abstract=293179 or http://dx.doi.org/10.2139/ssrn.293179

Contact Information

Silvan Ebnöther
Zurich Cantonal Bank ( email )
Josefstrasse 222
CH-8000 Zurich
Switzerland
Paolo Vanini (Contact Author)
Zurich Cantonal Bank ( email )
Josefstrasse 222
CH-8005 Zurich
Switzerland
University of Basel ( email )
Petersplatz 1
Basel, CH-4003
Switzerland
Alexander McNeil
Swiss Federal Institute of Technology Zurich - Department of Mathematics ( email )
ETH Zentrum HG-F 42.1
Raemistr. 101
CH-8092 Zurich, 8092
Switzerland
+41 1 632 61 62 (Phone)
+41 1 632 10 85 (Fax)
Pierre Antolinez-Fehr
Zurich Cantonal Bank ( email )
Neue Hard 9
Corporate Risk Control
CH-8000 Zurich
Switzerland
+41 1 275 70 17 (Phone)
+41 1 272 19 39 (Fax)
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