The Information Value of Past Losses in Operational Risk
42 Pages Posted: 8 Apr 2019
Date Written: February 19, 2019
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: Suggested Citation