The Information Value of Past Losses in Operational Risk

47 Pages Posted: 8 Apr 2019 Last revised: 21 Jan 2021

See all articles by Filippo Curti

Filippo Curti

Federal Reserve Bank of Richmond - Quantitative Supervision & Research

Marco Migueis

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: January 13, 2021

Abstract

Operational risk is a substantial source of risk for US banks. Improving the performance of operational risk models allows banks' management to make more informed risk decisions by better matching economic capital and risk appetite, and allows regulators to enhance their understanding of banks' operational risk. We show that past operational losses are informative of future losses, even after controlling for an exhaustive set of financial characteristics. We propose that the information provided by past losses results from them capturing hard to quantify factors such as the quality of operational risk controls, the risk culture, and the risk appetite of the bank.

Keywords: Banking, Operational Risk, Risk Management

JEL Classification: G15, G18, G19, G21, G32

Suggested Citation

Curti, Filippo and Migueis, Marco, The Information Value of Past Losses in Operational Risk (January 13, 2021). Available at SSRN: https://ssrn.com/abstract=3353446 or http://dx.doi.org/10.2139/ssrn.3353446

Filippo Curti

Federal Reserve Bank of Richmond - Quantitative Supervision & Research ( email )

530 E Trade St
Charlotte, NC 28202
United States

Marco Migueis (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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