Practical Methods for Measuring and Managing Operational Risk in the Financial Sector: A Clinical Study

A. Chapelle, Y. Crama, G.M.B.J. Hübner, J.P. Peters

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42 Citations (Scopus)

Abstract

This paper analyzes the implications of the advanced measurement approach (ama) for the assessment of operational risk. Through a clinical case study on a matrix of two selected business lines and two event types of a large financial institution, we develop a procedure that addresses the major issues faced by banks in the implementation of the ama. For each cell, we calibrate two truncated distributions functions, one for “normal” losses and the other for the “extreme” losses. In addition, we propose a method to include external data in the framework. We then estimate the impact of operational risk management on bank profitability, through an adapted measure of raroc. The results suggest that substantial savings can be achieved through active management techniques.
Original languageEnglish
Pages (from-to)1039-1061
Number of pages23
JournalJournal of Banking & Finance
Volume32
Issue number6
DOIs
Publication statusPublished - 1 Jan 2008

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