Toward an Efficient People-Risk Capital Allocation for Financial Firms: Evidence from US Banks

24 Pages Posted: 6 Jan 2018

See all articles by Jose Manuel Feria-Dominguez

Jose Manuel Feria-Dominguez

Pablo de Olavide University

Enrique Jose Jimenez-Rodriguez

Universidad Pablo de Olavide - Department of Business Administration

Date Written: March 21, 2017

Abstract

Although people are a very important asset for financial firms, they are a key source of risk. Banks must allocate regulatory capital for covering their people-risk exposure. By using the Algo OpDataTM data set from US banks, and based on the loss distribution approach, we first estimate people-value-at-risk (people-VaR), assuming perfect correlation among people-risk categories but nonperfect dependence, for which the multivariate fast Fourier transformation is proposed. The diversified people-VaR is provided as a key indicator of an efficient capital allocation, and the traditional risk-adjusted return on capital measure is then readapted to evaluate the people-risk-adjusted performance.

Keywords: People-Risk, Financial Firms, Loss Distribution Approach (LDA), Multivariate Fast Fourier Transformation (MFFT), Risk-Adjusted Return On Capital (RAROC)

Suggested Citation

Feria-Dominguez, Jose Manuel and Jimenez-Rodriguez, Enrique Jose, Toward an Efficient People-Risk Capital Allocation for Financial Firms: Evidence from US Banks (March 21, 2017). Journal of Operational Risk, Vol. 12, No. 4, 2017. Available at SSRN: https://ssrn.com/abstract=3079376

Jose Manuel Feria-Dominguez (Contact Author)

Pablo de Olavide University ( email )

41013 Seville
Spain

Enrique Jose Jimenez-Rodriguez

Universidad Pablo de Olavide - Department of Business Administration ( email )

41013 Seville
Spain

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