Managing Operational Risk Using Bayesian Networks: A Practical Approach for the Risk Manager

The International Journal of Business Management and Technology, Volume 4 Issue 6 November–December 2020

16 Pages Posted: 10 Feb 2021

See all articles by Martin Leo

Martin Leo

S P Jain School of Global Management

Suneel Sharma

S P Jain School of Global Management

K Maddulety

S P Jain School of Global Management

Date Written: November 24, 2020

Abstract

This paper provides a practical approach to construct and learn a Bayesian network model that will enable an operational risk manager communicate actionable operational risk information for informed decision making by senior managers. Bayesian networks and their application in operational risk management has been widely studied; however, literature and research has predominantly focused on their application in modeling and measuring operational risk for capital calculation purposes. We detail the approach to construct and learn a BN model, from an incident database, using the machine learning capabilities in the R package bnlearn. The modeling and the inference capabilities of the Bayesian Networks can be applied to business-as-usual risk management techniques such as loss analysis, scenario analysis, risk assessment, development of key risk indicators, and risk reporting.

Keywords: Bayesian networks, Probabilistic Graphical Models, machine learning, operational risk management, banking

Suggested Citation

Leo, Martin and Sharma, Suneel and Maddulety, K, Managing Operational Risk Using Bayesian Networks: A Practical Approach for the Risk Manager (November 24, 2020). The International Journal of Business Management and Technology, Volume 4 Issue 6 November–December 2020, Available at SSRN: https://ssrn.com/abstract=3739841

Martin Leo (Contact Author)

S P Jain School of Global Management ( email )

10 Hyderabad Road
P. O. Box 502345
Singapore, 119579
Singapore

Suneel Sharma

S P Jain School of Global Management ( email )

10 Hyderabad Road
P. O. Box 502345
Singapore, 119579
Singapore

K Maddulety

S P Jain School of Global Management ( email )

10 Hyderabad Road
P. O. Box 502345
Singapore, 119579
Singapore

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