The Quantification of Operational Risk

38 Pages Posted: 30 Dec 2003  

Markus Leippold

University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Paolo Vanini

University of Basel

Multiple version iconThere are 2 versions of this paper

Date Written: November 2003

Abstract

We examine the quantification of operational risk for banks. We adopt a financial economics approach and interpret operational risk management as a means of optimizing the profitability of an institution along its value chain. We start by defining operational risk and then propose a framework to model risk mitigation through the bank's value chain over time. Using analytical and numerical methods, we obtain answers concerning capital allocation, network stability, risk figures, and diversification issues. Interpreting the results shows that the usual intuition gained from market and credit risk does not apply to the quantification of operational risk.

Keywords: Operational Risk Management, Stochastic Systems, Diversification, Profitability

JEL Classification: C19, C69, G18, G21

Suggested Citation

Leippold, Markus and Vanini, Paolo, The Quantification of Operational Risk (November 2003). Available at SSRN: https://ssrn.com/abstract=481742 or http://dx.doi.org/10.2139/ssrn.481742

Markus Leippold (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Paolo Vanini

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

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