The Information Value of Past Losses in Operational Risk

42 Pages Posted: 8 Apr 2019

See all articles by Filippo Curti

Filippo Curti

Federal Reserve Banks - Federal Reserve Bank of Richmond

Marco Migueis

Federal Reserve Board

Date Written: February 19, 2019

Abstract

Operational risk is a substantial source of risk for US banks. Improving the performance of operational risk models' allows banks' management to make better risk decisions by better matching economic capital and risk appetite, and allows regulators to better understand the risk of banks. 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 (February 19, 2019). Available at SSRN: https://ssrn.com/abstract=3353446 or http://dx.doi.org/10.2139/ssrn.3353446

Filippo Curti

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Marco Migueis (Contact Author)

Federal Reserve Board ( email )

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

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